SINGAPORE - It is taboo for Thais to publicly voice their fears about what might happen when the reign of their ailing 81-year-old King Bhumibol Adulyadej ends. But the reaction of Thai markets this week spoke louder than words.

Thailand's bourse tumbled on Wednesday and Thursday and the baht slid on concerns about the king's health. There was a recovery on Friday, but the fact that even vague rumors could spark a sharp sell-off showed just how worried Thais are about a change of monarch, and how badly Thailand's markets will be hit.

Don't believe the market rumors. Only believe the palace's statements, said a Royal Household Bureau spokesman.

It is clear, though, that even if this health scare passes, investors are deeply concerned about what might lie ahead.

The dangers are never discussed in public because Thailand has strict lese majeste laws that forbid talk of the monarchy's role and possible problems on the horizon. Frank analysis of the political outlook is a rarity, and so many foreign investors have only a hazy idea of the risks they face.

But analysts say privately that there could be a prolonged period of turmoil and even significant civil unrest, and this is why markets are so vulnerable to rumors about his health.

DIVISIONS AND DEADLOCK

What makes the succession issue so dangerous now is that Thailand has been locked for years in a political and social conflict between supporters and opponents of populist former prime minister Thaksin Shinawatra, who was ousted in a military coup three years ago and now lives in self-imposed exile.

Thaksin swept to power in 2001, promising a raft of policies aimed at the poor, and won a second term with an even stronger majority in 2005. Thaksin's huge support from the rural poor meant he had a big enough majority to govern without the usual backroom deals and concessions to the bureaucracy and military.

Thaksin's growing power and impregnable electoral base, plus accusations of corruption, alarmed the elite groups who have traditionally run Thailand, and the military launched a coup.

Thailand is now divided into two bitterly opposed camps: the pro-Thaksin red shirts who are furious that successive governments they voted for were toppled by the military or judiciary; and the yellow shirts -- royalists, the military and urban Thais, who back Prime Minister Abhisit Vejjajiva.

The conflict has sparked several bouts of unrest that have damaged Thailand's economy and investment attractiveness. Last year, anti-Thaksin protesters blockaded Bangkok's two main airports, and in April red shirt protesters stormed an Asian summit in Pattaya, forcing its cancellation.

A country once regarded as a haven of regional stability is increasingly viewed as a basket case. In 2002, the World Bank's World Governance Indicators rated Thai political stability at 59.1 out of 100. By 2008, that rating had dived to 12.9.

THE MONARCHY'S ROLE

In theory, Thailand's monarchy is above the country's political divisions. Bhumibol is a constitutional monarch, with no formal political powers, and he is widely respected by Thais who regard him as a unifying force in a fractured country.

Yet during his six decades on the throne, Bhumibol expanded his influence on politics, and explicitly intervened three times during periods of conflict between the military and elected officials. Furthermore, the palace is seen by many Thais as having taken sides against Thaksin over the past three years.

The king's chief adviser, Privy Councilor Prem Tinsulanonda, was very close to many of the coup plotters, and is regarded as a key ally of the yellow shirts. Bhumibol's wife, Queen Sirikit, also signaled support for the anti-Thaksin movement last year by attending the funeral of a female yellow shirt protester.

So the palace has been drawn into the conflict, and in turn the conflict has become partly about the appropriate role of the monarchy. Thaksin's supporters want the ballot box to prevail, so governments they elect can rule without meddling by the elites.

Many monarchists argue that the rural population are not well enough educated for democracy to work, so the military, bureaucracy and elites should have wide control over policy.

Because Bhumibol is so widely respected in Thailand, most Thais are comfortable with the influence he wields, and all sides in the conflict stress their loyalty to the crown. But Bhumibol's son and presumed heir, Crown Prince Maha Vajiralongkorn, is regarded far less favorably by most Thais.

The result will be a huge shift in the balance of power -- the red shirts are likely to be bolder in their rejection of the monarchy's political influence, which could in turn provoke a crackdown by elites worried the monarchy is losing influence.

The conflict that has already done so much damage would escalate. And the long-term stability that investors want to see would be further away than ever.

(Editing by John Chalmers)

Thailand