UPDATE 1-UK's Brown readies for election with policy U-turns

* Government shelves plan for part-sale of Royal Mail

* Decision follows watering-down of identity card plan

* Analysts say election "phoney war" is under way (Adds government defeat, quote, paragraphs 7-10)

By Adrian Croft

LONDON, July 1 (Reuters) - British Prime Minister Gordon Brown's government on Wednesday made its second strategic U-turn in as many days in an apparent bid to clear the decks of divisive policies in the run-up to a national election.

The government announced it would shelve a partial sale of the state-owned postal service, Royal Mail, just a day after it watered down a controversial plan to introduce identity cards and ruled out making the cards compulsory. Political analysts saw both moves as part of a drive by the unpopular government to abandon proposals that divided the ruling Labour Party or alienated voters before an election that Brown must call within 11 months.

Labour lags the opposition Conservatives by up to 16 points in the polls and faces an uphill battle to rebuild its popularity at a time when unemployment is rising and the economy is shrinking during a deep recession.

Brown, who faced down a revolt against his leadership last month and whose party has been scarred by a row over politicians' expenses, wants to neutralise issues that split Labour and its supporters.

"They are trying to look forward to the general election. They are trying to put a positive case as best they can," Steven Fielding, director of Nottingham University's Centre for British Politics, told Reuters.

Senior Conservative Ken Clarke said the government was in a state of "paralysed indecision".

"They cannot take any decision on any difficult subject," he told the BBC.

PARLIAMENTARY DEFEAT

The government, already the unwilling owner of large stakes in several banks hit by the credit crunch, stripped rail operator National Express (NEX.L) of its loss-making East Coast service on Wednesday and said it would be run by a public body.

In a setback for Brown, the government suffered a rare parliamentary defeat on Wednesday over plans to allow parliamentary debates to be used as evidence in court against legislators accused of corruption.

Around 25 Labour members joined opponents in voting down the plan, which they saw as an attack on their freedom of speech.