Bahrain protesters rally for third day

Protesters in Bahrain, emboldened by revolts that have toppled Arab rulers in Tunisia and Egypt, poured into the Gulf island kingdom's capital on Wednesday to mourn a demonstrator killed in clashes with security forces.

A crowd estimated at more 1,000 people joined a long and winding Shi'ite funeral procession for the man, shot dead on Tuesday when fighting erupted at the burial of another protester.

Around 2,000 others were camped out at a major road junction in the centre of Manama, hoping to emulate the rallies on Cairo's Tahrir Square and demanding a change of government in Bahrain, where a Sunni family rules over a Shi'ite majority.

The protests, in their third day, are some of the most serious since widespread Shi'ite unrest of the 1990s, and appear to be driven by familiar complaints of economic hardship, lack of political freedom and sectarian discrimination.

The people demand the fall of the regime! protesters chanted as men pounded their chests in rhythm, a mourning gesture which is distinctive to the Shi'ite branch of Islam.

King Hamad bin Isa al-Khalifa has expressed condolences to relatives of the two dead men, and said a committee would investigate. The Interior Ministry has promised legal action if it finds police used unjustifiable force.

Though itself only a minor oil exporter, Bahrain's stability is important for neighbouring Saudi Arabia, where oilfields are home to an oppressed Shi'ite minority.

Bahrain is also a hub for banking and financial services in the Gulf and home to the U.S. Navy's Fifth Fleet.

PRIME MINISTER SINCE 1971

Protesters, their tone hardened by the deaths of two Shi'ite men within 24 hours, want the removal of the prime minister, Sheikh Khalifa bin Salman al-Khalifa, who has governed since British rule ended in 1971.

For now, they have not sought change at the very top -- his nephew King Hamad bin Isa al-Khalifa has ultimate control over the 1.3 million people in Bahrain, half of them foreigners.

We are requesting our rights in a peaceful way, said Bakr Akil, a 20 year-old student. He wore a sheet stained with red ink that he said showed his willingness to sacrifice for freedom.

Women dressed in black abaya cloaks followed the procession with their own chants calling for peace and Bahraini unity.

Mourners tossed stems of sweet-smelling basil onto the car ferrying the cotton-wrapped body, draped in a green Islamic banner, through winding alleyways towards a small cemetery for burial. Black flags of mourning flew.

Bahrain's Shi'ites, whose branch of Islam is found mostly across Gulf waters in Iran and among Arabs in Iraq and Lebanon, complain they are shut out of public housing, healthcare and government jobs and also that their rulers have tried to shift the demographic balance by making Sunni immigrants citizens.

A Bahraini central bank official said the protests would not impact the country's economy or financial sector.

But in a measure of investors' concerns, the cost of insuring Bahraini debt against the government defaulting rose its highest level since August 2009 with 5-year credit default swaps up 13 percent in the past two days.

Bahrain's main stock index was flat, while in neighbouring Saudi Arabia, which is connected to Bahrain via a causeway, the main share index fell 1.8 percent to a two-week low.

Near the protest site at Manama's Pearl Roundabout, police kept their distance, massing on a nearby dirt lot in dozens of cars. The Interior Ministry said roads were all open on the island, which at 750 square kilometres (290 sq mile) is about the size of Singapore.

The main Shi'ite opposition group Wefaq, which boycotted parliament in protest at the clampdown by the security forces, said it would hold talks with the government on Wednesday.

We support the people here. We are not the decision makers, said Ibrahim Mattar, a Wefaq parliamentarian who had joined the funeral procession.

The people are the decision makers, Mattar said, adding that Wefaq would call for direct election of the prime minister.

REGIONAL IMPLICATIONS

Bahrain was considered the most vulnerable among Gulf Arab states to popular unrest in a region where, in an unwritten pact, rulers have traded a share of their oil wealth for political submission. Discontent has been expressed in sporadic unrest since the mid-1990s, well before popular uprisings in Tunisia and Egypt emboldened activists across the region.

Activists also want the release of political prisoners, which the government has promised, and a new constitution.

An upset in Bahrain could embolden marginalised Shi'ites in Saudi Arabia, the world's biggest oil exporter. The United States has called for restraint on both sides.

The United States is very concerned by recent violence surrounding protests in Bahrain, State Department spokesman P.J. Crowley said in a statement. We also call on all parties to exercise restraint and refrain from violence.

Last week, apparently seeking to defuse discontent, King Hamad offered cash payouts of some $2,500 (1,560 pounds) to every local family.

The Sunni-Shi'ite schism dates back 13 centuries to disputes over the succession to the Prophet Mohammad. Sunni rulers in Saudi Arabia and other Arab states share Western fears that Iran -- a non-Arab Shi'ite state -- is seeking to become a nuclear power with ambitions to dominate the region.

Protesters in Bahrain were at pains to deny any sectarian motive and any involvement from Iran, just across the Gulf.

(Writing by Reed Stevenson; editin