U.S. warns Honduras' de facto leader on economic aid

WASHINGTON (Reuters) - The United States has warned Honduras' de facto government it could face cuts in economic aid if it fails to reach a deal with ousted President Manuel Zelaya on restoring democratic rule.

The government that took power when Zelaya was toppled in a June 28 coup has flatly refused to allow his return to power, and negotiations mediated by Costa Rican President Oscar Arias collapsed on Sunday.

Washington hopes Arias can broker a deal that includes Zelaya's return, and Secretary of State Hillary Clinton spoke with the de facto government's leader Roberto Micheletti after talks fell apart, urging him to continue with negotiations.

"She made clear, if the de facto regime needed to be reminded, that we seek a restoration of democratic and constitutional order, a peaceful resolution," spokesman P.J. Crowley told reporters on Monday.

"She reminded him about the consequences for Honduras if they fail to accept the principles that President Arias has laid out, which would (have) a significant impact in terms of aid and consequences, potentially longer-term consequences ... for the relationship between Honduras and the United States."

President Barack Obama is seeking to mend U.S.-Latin American ties that were often strained under predecessor George W. Bush.

So far, his administration has condemned the coup in Honduras and cut $16.5 million in military aid, but has largely taken a hands-off approach to the crisis, leaving Arias and the Organization of American States to take the lead.

Crowley hinted the United States might now take further steps to pressure Micheletti, although it was not clear what was being considered or when any sanctions might be applied.

The options include slashing $180 million in economic aid.

The European Commission on Monday suspended all budgetary support payments to Honduras to increase the pressure on Micheletti, although he again insisted he would not give in.

TIME TO INCREASE PRESSURE?

Some analysts say the Obama administration needs to step up sanctions to pressure the interim government to accept Arias' seven-point plan, allowing Zelaya to return to Honduras to set up a coalition government that includes rival parties.

"If the United States is to send a message that coups in this day and age in Latin America are not acceptable ... the message needs to be reinforced," said Vicki Gass, with the Washington Office on Latin America think tank.

A U.S. congressional aide who has spoken to diplomats from the Central American region said U.S. options for pressuring Micheletti were limited, but included stopping the issuance of U.S. visas, freezing the assets of Hondurans in the United States and suspending U.S. assistance.

The aide, who spoke to Reuters on condition of anonymity, said freezing aid in particular was not attractive because Honduras is such a poor country and "the people that are going to be affected are not the government."

Julia Sweig, a senior Latin America analyst at the Council on Foreign Relations in Washington, said the threatened sanctions, to be effective, would need to be clearly and promptly stated.

"The threat must be stated very explicitly, now," said Sweig, adding: "The last thing that Micheletti and his forces could endure is global economic sanctions and being treated like a pariah. That's the road he's going down."

(Additional reporting by Paul Eckert and Susan Cornwell in Washington; Editing by Kieran Murray and Peter Cooney)