LAHORE, Pakistan (Reuters) - Thousands of supporters of former Pakistan premier Nawaz Sharif protested on Thursday, a day after a court ruling to exclude him and his brother from elected office raised fears of renewed political turmoil.

The nuclear-armed U.S. ally appeared set for a power struggle after the Supreme Court ruling that also brought down a provincial government controlled by opposition leader Sharif, President Asif Ali Zardari's main rival.

Sharif told a rally of several thousand supporters near the eastern city of Lahore, the capital of Punjab province and the Sharifs' power-base, that the people rejected the bogus court ruling, for which he said Zardari was responsible.

The decisions of the masses have always been trampled either by judges or dictators, Sharif told the crowd.

Today the decision of the people has to be accepted ... we'll see who dares defy this decision of the people.

The court decision to nullify the election last year of Sharif's younger brother, Shahbaz, as Punjab's chief minister and to leave in place an electoral ban on Nawaz raised fears of a return to the turbulence of the 1990s, a decade that ended in a military takeover.

Mostly peaceful protests were held across Punjab on Thursday but police fired tear gas to disperse a crowd that torched cars on the outskirts of Islamabad. Protesters stoned a bank in the town of Multan.

Pakistan can ill afford the distraction of political turmoil.

The economy is only afloat thanks to an International Monetary Fund loan and Islamist militants threaten security.

The court decision wiped 5 percent off share values on the Karachi market on Wednesday and the index fell 3 percent early on Thursday. But it recovered and ended up on International Monetary Fund comment about the possibility of easing monetary policy.

TRIGGERED A WAR

In Lahore, about 3,000 Sharif supporters took to the streets outside the provincial assembly burning tires and chanting anti-government slogans.

Police had earlier sealed off the assembly to stop Sharif party members, who hold a majority of seats, holding a debate.

He has triggered a war which he can't control, Sharif party politician Rana Ijaz Ahmed Khan told the crowd, referring to Zardari. We've accepted it as a challenge and will teach power-hungry Zardari a lesson.

A showdown between Zardari, widower of assassinated former prime minister Benazir Bhutto, and two-time prime minister Nawaz Sharif has been brewing since they forced former army chief Pervez Musharraf to quit as president last August.

Zardari imposed governor's rule, or direct rule by his representative, in Punjab for two months late on Wednesday.

Zardari's party dismissed any suggestion of the president's involvement in the court ruling and said it should not be exploited to derail national reconciliation.

Prime Minister Yousaf Raza Gilani, a member of Zardari's party, said he was saddened by the court ruling.

Sharif's party came second to Zardari's in an election a year ago. It later dropped out of a coalition over a dispute over the restoration of judges Musharraf dismissed in 2007.

Sharif's supporters see the Supreme Court as a tool of Zardari and Sharif has refused to recognize the legitimacy of a chief justice he regards as a Musharraf appointee.

Sharif backs a lawyers' protest movement which is gearing up for a new round of protests in mid-March to press for the reinstatement of the chief justice Musharraf dismissed.

Zardari is unpopular among Pakistanis because of old corruption allegations but he is seen as pro-West and dovish toward India. Western governments are wary of Sharif, who represents the religious conservative mainstream.

(Additional reporting by Asim Tanver in Multan; Writing by Robert Birsel; Editing by Paul Tait)

Pakistan