* Londonderry builds tourist boom on hard-won peace
* UK City of Culture celebrations to end with Turner prize
* Community relations hit all time high as Belfast struggles
By Conor Humphries
LONDONDERRY, Oct 16 (Reuters) - While cars burned on the streets of Belfast this summer in its worst year of rioting for a decade, Northern Ireland's second city of Londonderry was filled with tourists as its once bitterly divided population celebrated a stunning rejuvenation.
Some 40 years after Londonderry became the centre of the "Troubles" when British troops shot dead 13 people at a civil rights protest on what became known as Bloody Sunday, Catholics and Protestants watched calmly as some of the city's most entrenched taboos were broken.
The transformation offers a striking example for the British province of how sectarian enmities can be overcome and holds lessons in particular for Belfast, a city where entrenched divisions have done much to undermine the progress made since a 1998 peace deal intended to end the long years of violence.
"It would be hard to destabilise this city at this point," said Willie Temple, a pro-British Protestant in Londonderry who became an activist to defend his community at the height of the unrest in the 1970s. "People have seen the benefits of peace."
There has been tension in the city since Protestant settlers arrived from England and Scotland in the 17th century, adding the London prefix to the Gaelic name Derry as they consolidated their hold on the north of the country.
Catholics have continued to use the name Derry to show their resistance to British rule, but even that dispute has faded in recent years and many Protestants now use Derry in casual conversation.
Efforts by Irish nationalists to fight what they saw as discrimination against Catholics and end rule from London contributed to three decades of tit-for-tat killings as the British army struggled to control the city.
This summer, the army barracks that once struck fear into nationalists became the headquarters of Londonderry's year as UK City of Culture, hosting an Irish dancing marathon.
The annual August parade to mark a Protestant victory in a 17th century battle once sparked riots, but passed without trouble for the first time as tourists took pictures. Its pipers later opened a traditional Irish music festival.
"I don't think this could have happened even five years ago," said John Lafferty, a retired supermarket worker walking past the scene of the Bloody Sunday shootings, now a tourist attraction. "There is a different mindset now."
The city of 100,000 has received tens of millions of pounds of investment from the government and the European Union to redevelop the barracks, spruce up its squares and build a bridge across the river than separates the Catholic and Protestant communities.
Bookings at the city's hotels have risen 40 percent from five years ago and there are plans for two new hotels in the city centre. More than 400,000 people visited in one week in August for the Irish musical festival, the Fleadh Cheoil.
"There's a feeling of confidence," said Aran Mcelenny, who works for a local estate agent. "It's just a completely different place to what it was before."
The scenes in Londonderry have contrasted with Belfast's year of riots, sparked by a decision to restrict the flying of the British flag from City Hall, which enraged young pro-British Protestants.
They rioted again at the time of traditional Protestant marches in the summer, some of which were blocked by authorities. Irish nationalists responded by staging their own pitched battles with police.
When a similar situation gripped Londonderry in the late 1990s, city businessmen stepped in to hold talks, building the foundations of a cross-community infrastructure.
The groups have regular meetings about potential flash points and keep an emergency mobile phone list so leaders from both sides can hold instant talks when problems arise.
"The secret is direct dialogue, people talking rather than organisations talking," said Temple, the Protestant community worker.
The situation in Belfast has deteriorated to the point where a commission set up by the province's power-sharing government to regulate parades has become a major source of political antipathy, with unionists demanding it be scrapped.
"Belfast could learn from this city," said Michael Doherty, an important player in the inter-community talks from the Catholic side in Londonderry. "They haven't given themselves the opportunity to build trust."
But Londonderry has natural advantages over Belfast, whose much larger population of 280,000 is spread across a patchwork of Catholic and Protestant areas.
A census last year showed Belfast had a small Catholic majority for the first time, heightening fears among Protestants that their political power is waning.
In Londonderry, by contrast, the Protestants have long accepted their role as a minority of around 25 percent, which activists say has increased pressure on them to compromise.
But as ever in Northern Ireland, there is a complication. As former leaders of the nationalist Irish Republican Army have increased their cooperation with pro-British politicians, a small minority of so called "dissident" militants has emerged, with the Londonderry region as a stronghold.
There have been several bomb threats against the police and the organisers of the City of Culture, but the security forces have succeeded in preventing any attacks.
"There is a severe threat in Northern Ireland," said regional police chief Stephen Martin. "(But) this has been a tremendous year for the city."