* Prosecutor denies wiretapping reports
* Erdogan accuses U.S.-based cleric of seeking to unseat him
* Gulen lawyer says matter unjustly attributed to his client
By Orhan Coskun
ANKARA, Feb 24 The network of a U.S.-based cleric illegally tapped thousands of telephones in Turkey to blackmail and concoct criminal cases as part of a campaign of covert influence over government, a top adviser to Prime Minister Tayyip Erdogan said on Monday.
A lawyer for preacher Fethullah Gulen, accused by Erdogan of building a parallel command structure in police and judiciary, described the accusations as unjust and contributing to an atmosphere of "hatred and enmity" in Turkish society.
The government accuses Gulen's Hizmet (Service) network of engineering corruption charges against figures including businessmen close to Erdogan that came to light with a series of raids on Dec. 17. The scandal has posed the biggest challenge yet to Erdogan's 11-year-rule.
The government responded by reassigning thousands of police and hundreds of prosecutors and judges in a bid to purge the influence of Gulen, once an ally of Erdogan believed to have helped the prime minister rein in the power of the military.
Hizmet runs a large network of schools, businesses and media groups in Turkey and across the world. Tension with Erdogan came to light when the prime minister moved to close the schools, a primary source of Hizmet's income and influence.
One of the prosecutors named in newspaper reports as being involved in wire tapping denied the accusation.
"There was definitely no monitoring or phonetapping of thousands of politicians, writers, NGO representatives and businessmen in the framework of this dossier in the way that the newspaper stories say," prosecutor Adem Ozcan said in a statement carried by news websites.
According to Star newspaper, Erdogan adviser Yalcin Akdogan and others including the interior minister, the national intelligence agency head and politicians from various parties were among those whose phones were tapped over three years.
"For years they listened to 7,000 people and were going to open a court case against them for being a member of an imaginary criminal organisation," Akdogan told Reuters.
"Completely imaginary crimes are created, a scenario is created based on phone-tapping...If you listen to somebody for five years you can construct a crime with imaginary scenarios."
"We are faced with a structure which listens to everybody illegally, follows everything concerning private life, using it when necessary as blackmail and fabricating crimes by people," Akdogan said.
Other senior Turkish officials also described widespread illegal eavesdropping, including of Erdogan himself.
"SELAM TERROR ORGANISATION"
Gulen's lawyer Nurullah Albayrak said in a statement there were "unjust" efforts to attribute the wiretapping to his client, calling for the matter to be investigated and saying such media reports were designed to be exploited politically.
"This situation will serve no purpose other than to provoke further the hatred and enmity which is being created in society," Albayrak said in a statement published by media outlets close to Gulen.
Star newspaper said two anti-terrorism prosecutors had obtained court orders authorising the phone-tapping as part of an investigation into the "Selam Terror Organisation", a hitherto unheard of group whose name means 'Greeting'.
Journalists, academicians, businessmen and senior members of various non-governmental organsations were among others whose phones were bugged, the paper said, publishing a full-page list of those targeted.
The Yeni Safak daily, also close to the government, said thousands of people including Erdogan were bugged.
Energy Minister Taner Yildiz, among those allegedly bugged, said he believed his phone was tapped for at least 2-1/2 years, describing such wire tapping as targetting all of Turkey and not just the AK Party.
"I believe this to be extremely wrong and a big insult to the Turkish state and the government," he told reporters in Ankara. "This is no longer just the AK Party's problem."
Earlier this month, senior officials said Turkey was launching a criminal investigation into the alleged "parallel state". A close ally of the cleric has accused the government of conducting a campaign of 'incitements and lynchings".
Parliament has passed laws tightening government control over the Internet and the courts. It has also drafted a law seeking powers for the national intelligence agency in what his opponents regard as an authoritarian backlash against the graft inquiry.
Gulen left Turkey and settled in the United States in the 1990s when a secularist establishment accused him of Islamist activities. He backed Erdogan's rise to power in 2002, but the two men's paths have diverged, Gulen criticising among other things his assertive policy on Israel and the United States. (Reporting by Orhan Coskun, Nick Tattersall, Samia Nakhoul and Ozge Ozbilgin; Writing by Daren Butler; editing by Ralph Boulton)