(Adds Obama, White House comments, London protest, paragraphs 8-11, 32)
* Hong Kong leader willing to let protests continue
* Demonstrators are calling for his resignation
* Thousands remain on city streets, refusing to budge
* China says Hong Kong affairs are its business
* U.S. President Obama says United States watching closely
By John Ruwitch and Yimou Lee
HONG KONG, Oct 2 (Reuters) - Hong Kong’s leader is willing to let pro-democracy demonstrations blocking large areas of the city go on for weeks if necessary, a source close to him said, while defiant protesters vowed they would not budge.
The city’s streets were calm early on Thursday while police largely kept their distance from the tens of thousands of mostly young people keeping up protests, now nearly a week old, in the heart of the global financial hub.
The protesters want Hong Kong’s leader, Leung Chun-ying, to step down by the end of Thursday and have demanded China introduce full democracy so the city can freely choose its own leader. Leung, appointed by Beijing, has refused to stand down, leaving the two sides far apart in a dispute over how much political control China should have over to Hong Kong.
The popular “Occupy Central” movement presents one of the biggest political challenges for Beijing since it violently crushed pro-democracy protests in Tiananmen Square in 1989.
Leung, Hong Kong’s chief executive, is prepared to allow the protests to subside and will only intervene if there is looting or violence, said a government source with ties to Leung.
“Unless there’s some chaotic situation, we won’t send in riot police ... We hope this doesn’t happen,” the source said. “We have to deal with it peacefully, even if it lasts weeks or months.” Leung could not be reached for comment.
Riot police used tear gas, pepper spray and baton charges last weekend to quell unrest, the worst in Hong Kong since China resumed its rule of the former British colony in 1997.
U.S. President Barack Obama told visiting Chinese Foreign Minister Wang Yi, who earlier met Secretary of State John Kerry, that Washington was watching the protests closely and urged a peaceful solution.
“The United States has consistently supported the open system that is essential to Hong Kong’s stability and prosperity, universal suffrage, and the aspiration of the Hong Kong people,” the White House said in a statement about the meeting, also attended by national security adviser Susan Rice.
Universal suffrage is an eventual goal under the “one country, two systems” formula by which China rules Hong Kong. Under that formula, China accords Hong Kong some autonomy and freedoms not enjoyed in mainland China.
However, protesters calling for free elections reacted angrily when Beijing decreed on Aug. 31 that it would vet candidates wishing to run in Hong Kong’s 2017 election.
Wang said before an earlier meeting with Kerry that countries should not meddle in China’s internal affairs.
“The Chinese government has very formally and clearly stated its position. Hong Kong affairs are China’s internal affairs. All countries should respect China’s sovereignty,” Wang said.
National Day, a public holiday marking the Communist Party’s foundation of the People’s Republic of China in 1949, passed on Wednesday without the police crackdown many in Hong Kong had feared, although some people booed while the national anthem was played at a ceremony.
In the early hours of Thursday, another public holiday, around 200 people had gathered near Leung’s office in Central district and about 50 police officers stood beside metal barriers erected there.
Protesters across the city have dug in, setting up supply stations with water bottles, fruit, disposable raincoats, towels, goggles, face masks and tents.
Even so, some in the crowds wondered how long the status quo could last.
“I don’t think we can stay like this for more than two weeks,” said Moses Ng, a 26-year-old who works in sales and marketing, gesturing towards young people milling around barricaded streets in Causeway Bay, a major shopping district.
“(If so) this action would have totally failed, so we are thinking about what else we can do.”
Others, like 17-year-old secondary school pupil Wong Chi Min, were more defiant.
“People will keep coming back every day,” he said. “We will wait for CY (Leung) to step down so we can choose our own leader. If he doesn’t, we will continue to wait here.”
The Hong Kong Federation of Students, one of the protest organisers, urged people to surround more government buildings from Friday unless the authorities accepted their demands.
But Leung has said Beijing would not back down and that Hong Kong police would be able to maintain security without help from People’s Liberation Army troops from the mainland.
China has dismissed the protests as illegal, but in a worrying sign for the Communist Party leadership in Beijing, the demonstrations have spread to neighbouring Macau and Taiwan.
China now faces a dilemma.
Cracking down too hard on the movement could shake confidence in market-driven Hong Kong, which has a separate legal system from the rest of China. Not reacting firmly enough, however, could embolden dissidents on the mainland.
A strongly worded editorial in the People’s Daily, the Communist Party’s official organ, criticised the “Occupy Central” protests for being confrontational.
“And now, a handful of people are bent on confronting the law and stirring up trouble. (They) will eventually suffer the consequences of their actions,” it said on Wednesday.
Rights groups said a number of China-based activists supporting the Hong Kong protests had been detained or intimidated by police on the mainland.
Around 5,000 people crowded into Taipei’s Liberty Square on Wednesday in a show of solidarity with Hong Kong. Events are being watched closely in Taiwan, which has full democracy but is considered by Beijing as a renegade province that must one day be reunited with the mainland.
In the world’s largest gambling hub of Macau, a former Portuguese colony and like Hong Kong a Chinese “special administrative region”, organisers said around 1,200 people gathered in Friendship Square to show their support.
In London, hundreds of protesters gathered outside the Chinese embassy, some carrying umbrellas that have become the symbol of the Hong Kong demonstrations.
Turmoil in Hong Kong has begun to affect the economy.
Hong Kong radio RTHK quoted Joseph Tung, executive director of the city’s Travel Industry Council, as saying China’s tourism authorities had suspended approval of tourist groups from the mainland to Hong Kong, citing safety issues.
Some banks and other financial firms have begun moving staff to back-up premises on the outskirts of Hong Kong to prevent growing unrest in the financial hub from disrupting trading and other critical functions.
On Wednesday, Italian luxury group Prada said it was monitoring unrest in Hong Kong on a hourly basis and closing shops early when necessary.
Hong Kong’s benchmark share index has fallen 7.3 percent over the past month. Markets are closed on Wednesday and Thursday for the holiday. (Additional reporting by Charlie Zhu, James Pomfret, Irene Jay Liu, Farah Master, Diana Chan, Twinnie Siu, Kinling Lo, Clare Baldwin, Diana Chan and Anne Marie Roantree in HONG KONGSui-Lee Wee in BEIJING, Stephen Addison in LONDON and Lesley Wroughton, Arshad Mohammed, Jeff Mason and Steve Holland in WASHINGTON, and Ahmed Aboulenein in LONDON; Writing by Mike Collett-White and Paul Tait; Editing by Mark Bendeich)