* Rebel region still scarred by war
* Whole villages abandoned, many still homeless
* Leader, residents say region’s future is with Russia
By Amie Ferris-Rotman and Nikolai Pavlov
TSKHINVALI, Georgia, Aug 4 (Reuters) - Under a lattice of green grapes dappling their courtyard, a Georgian-Ossetian couple sees a future with Russia for the tiny rebel region over which Tbilisi and Moscow fought a brief war a year ago.
"I don’t care if South Ossetia becomes part of another country, such as Russia," said Grigory Loladze, 71, an ethnic Georgian born in the rebel region’s capital Tskhinvali.
His South Ossetian wife Zamira, perched on a stool beside their plot of cucumbers, agreed: "We just don’t want war."
Russia crushed a Georgian assault last August and sent tanks into Georgia proper, pushing relations with the United States to a post-Cold War low. Moscow then recognised the tiny enclave on the slopes of the Caucasus mountains as an independent state.
A year later, tensions are still high in South Ossetia, and the signs of conflict are omnipresent.
Shattered cement crumbles off government doorways damaged last August and electricity and water shortages are common.
Moscow’s backing initially spurred dreams of statehood, but widespread poverty and thousands of homeless have since led the pine-covered statelet to change its tune.
Pro-Russia billboards — "Forever with Russia!" and "Ossetia is indivisible" — pepper the ravaged landscape.
Ethnically different from Georgians, South Ossetians say they have been separated from their fellow people in North Ossetia in Russia, who share the same Farsi-related language.
The leaking, four-km (2.5 mile) Rocky Tunnel from North Ossetia is now the only official way into the region.
Once resplendent with Georgian fruits, meat and cheeses traded by Georgians, sellers in Tskhinvali’s sole market, where dimly lit stalls are perched in mud, peddle what is left from South Ossetia’s dwindling agricultural industry as the roads to Georgia proper have been closed.
"South Ossetia belongs with Russia, with our own people," Liuda Zhdanova, 54, said, perusing the meagre offerings.
Unlike Abkhazia, another Georgian rebel region on the Black Sea which Moscow also recognised, South Ossetia has no tourist industry and its population is just 63,000. The rest of the world, apart from Nicaragua, consider both regions as part of Georgia.
FEARS OF INSTABILITY
Western powers worry the impoverished region could destabilise the South Caucasus, which hosts oil and gas pipelines that flow to the West.
"The people of South Ossetia want to be united with Russia," rebel leader Eduard Kokoity told Reuters in an interview overlooking Tskhinvali, which has not been rebuilt since breaking from Georgia in a war in the early 1990s.
The war plunged South Ossetia, which lies 100 km (60 miles) from Georgia’s capital Tbilisi, into total dependency on Russia, though Moscow’s reconstruction money is now drying up.
Russia has several military bases in South Ossetia, controls the landlocked region’s de facto borders and has given Russian passports to 98 percent of the population, where Russian is the lingua franca and the rouble the main currency.
The South Ossetian government says the last war zapped 80 percent of economic output from the already impoverished state.
Reconstruction money from Moscow trickles in — Kokoity said Russia has allotted 8.5 billion roubles ($272.9 million) this year — though the mountainous enclave says it needs more.
"Absolutely everything must be rebuilt. Of course it’s not enough," said Zurab Kabisov, head of the state reconstruction committee. Russia will give 11 billion roubles in 2010, he said.
Glistening under the sunshine in central Tskhinvali, the project manager of a pale yellow school financed with Russian money doubts he will be able to open in September.
"The money simply disappeared. My workers haven’t been paid in four months," he said on condition of anonymity, a plastic-wrapped piano and new desks behind him.
Kabisov dismissed complaints that the funds are being stolen. "We got every rouble".
Thousands of Ossetians were made homeless by the fighting, and 25,000 Georgians remain unable to return.
Near Tskhinvali, tractors carve out paths leading to rows of newly built two-storey pastel cottages resembling a U.S. suburb.
Homes in the district, called "Moscow" after the Russian capital’s mayor Yuri Luzhkov struck a deal with Kokoity, will be given to pensioners and young families whose homes were destroyed in the war.
"We’re still waiting, nothing has come of it yet. Thank God for my neighbours," said Svetlana Naniyeva, 64, who has been staying in a ramshackle windowless cabin with her friend since her own house was demolished.
"But we try keep faith in our government."
Ossetian Lavrenti, 72, and his wife are part of a handful of residents left in Eredvi, a predominantly Georgian village that was obliterated.
"Every evening was like a holiday. We men would sit and drink, chatting about everything under the sun," he said beside his front gate, which still bears the painted word "Ossetian", marked by soldiers to show the house had no Georgians.
"Now it’s just us," he sighed, pointing at his chickens, pigs and a cow on a lead.