ANALYSIS-Arrests stoke Turkish government-military tension

By Ibon Villelabeitia

ANKARA, Jan 11 (Reuters) - The arrest of senior Turkish officers over coup plot allegations further tests relations between the Islamist-rooted government and powerful military and complicates Ankara's efforts to tackle economic turmoil.

The "Ergenekon" coup plot investigation, which has already seen 86 people including retired army officers, politicians and lawyers put on trial, is viewed by many here as part of a battle for the soul of Muslim European Union candidate Turkey.

"If the prosecution continues as we have seen it we can have an extremely dangerous situation," Gareth Jenkins, an expert on Turkish security affairs based in Istanbul, said.

"The military will not allow things to continue."

The detentions by police last week of more than 40 people, including three retired generals and nine active officers, for suspected links to a plot to overthrow the government, prompted the armed forces chief General Ilker Basbug to call crisis talks with Prime Minister Tayyip Erdogan.

Four more military officers were arrested on Saturday.

News of the Basbug-Erdogan meeting in a country where the military has unseated governments four times in the past 50 years sparked panic selling at the Istanbul Stock Exchange and a call for calm from the leading business association.

The secularist establishment, which includes the military, judges and the state bureaucracy, says the governing AK Party is carrying out the arrests as revenge for a 2008 court case that sought to ban the party for anti-secular activities.

The AK Party, which embraces centre-right elements and nationalists as well as religious conservatives, denies this. It denies it has any hidden Islamist agenda and points to a record of liberal political reform that the EU feels has not gone far enough, but the conservative military views with some wariness.

Turkey can ill afford a fresh bout of instability, with tempers already high over the violence in Gaza and a run-up to municipal elections marked by accusations of government graft.

It faces a once-booming economy now in sharp decline, and the need to adopt tough reforms in its bid to join the EU.

"Turkey could face a paralysis in government with the economy in a free fall," Jenkins said.



ECONOMIC SLOWDOWN

After growing at an average rate of seven percent in the 2002-2007 period, the economy has slowed sharply. Turkey is seeking a loan agreement with the International Monetary Fund (IMF) to weather the effects of the global crisis and restore investor confidence.

Foreign direct investment in 2008 was estimated at $15 billion, down from a record $22 billion in 2007. Political paralysis could deter risk-averse investors, already worried about the impact of the global crisis in emerging markets.

This year also will see Turkey making major reforms to prepare for eventual EU membership.

These include bringing further civilian control over the military, granting more rights for minorities and economic liberalisation, all painful moves opposed by an increasingly recalcitrant opposition.

"2009 is going to be a decisive year for Turkey because there are many things in play, but the latest arrests have raised the stakes," Hugh Pope, a senior analyst from the International Crisis Group, said.

Eight-six people including retired army officers, politicians and lawyers, are already on trial for their links to the shadowy suspected coup-plotting group named Ergenekon that had been the subject of a long-running investigation.

The detention of military officers has caused deep concern in Turkey's powerful military, which has enjoyed an untouchable status since the foundation of modern Turkey.

A European diplomat who follows military matters in Ankara said General Basbug is under pressure from the rank and file to stand up to a government regarded as hostile toward them.

The case has rekindled a decades-long dispute between two elites -- the religious and the secular -- over the role of Islam in a country of 70 million that is officially secular but predominantly Muslim.

"The military is not going to burn the furniture but Basbug has to be seen defending the institutional prestige of the army," the diplomat said.

Turkey's judiciary, a bastion of secularists who until recently controlled key institutions, also has balked at the latest raids and has made its displeasure known.

A former state prosecutor and honorary chairman of the court of appeals known for initiating court cases against the AK Party had his house searched by police, prompting charges the government is willing to take on the judiciary.

The defendants in the coup plot case, who are accused of planning assassinations and bombings to sow chaos and force the military to step in, are all vocal critics of the government.

The AK Party has a tough task in showing that the case is not a witch hunt against opponents. If the case collapses, the government could face accusations by secularists of cajoling the judiciary into imposing its own Islamist order.

"The prosecutor needs to convince the public. We need to receive answers to our questions," leading commentator Mehmet Ali Birand wrote. (Editing by Michael Roddy)