Pardon follows increased international attention

* Move eases political tensions to focus on economy

* Shi’ite scholars negotiated release

(Adds reaction from Al-Wefaq opposition, background)

By Frederik Richter

MANAMA, April 12 (Reuters) – Bahrain’s king has pardoned 178 people charged with breaching state security, including two Shi’ite opposition leaders whose arrest sparked violent protests and whose trial has drawn international scrutiny.

A government source, who declined to be named, said on Sunday those pardoned included Hassan Mushaima, leader of the mainly Shi’ite opposition movement Haq, Shi’ite cleric Mohammed Maqdad and 33 other defendants on trial with them.

“You are now obliged to cooperate for the security of this country,” Bahrain’s news agency quoted Interior Minister Sheikh Rashed bin Abdullah al-Khalifa as telling the prisoners.

Regular night time battles between police with teargas and youths with bottles and burning barricades have contrasted sharply with efforts by the Gulf Arab kingdom to present itself as a stable place for international investors.

Jalila Sayed, a lawyer for the defendants, said this was not the first time Bahrain had pardoned opposition figures.

“We have this kind of play from time to time, except this time the magnitude is bigger, there are more people involved and the accusations are more serious,” Sayed said.

Mushaima had been in custody for a few hours in 2007, but was pardoned before his trial started, she said.

Nabeel Rajab, head of the Bahrain Human Rights Center, said the pardon followed unprecedented international pressure on Bahrain, whose government had underestimated the degree of popular opposition to Mushaima’s arrest.

“This will help ease the tension for the coming weeks,” Rajab said. “But if this is not followed by measures to end the … political and human rights crisis, which is the discrimination against the Shia, (this kind of) situation will come back.”

The Shi’ite opposition has attributed the unrest to grievances such as their marginalisation in jobs and services, a charge government officials deny.

INVESTOR SIGNAL

Jasim Husain, member of parliament for the Shi’ite opposition party Al-Wefaq, said the pardon would send a much needed signal to investors that Bahrain is able to solve its problems during the ongoing financial crisis.

Bahrain, a regional banking centre and small oil producer, is competing with other Gulf Arab states, particularly regional commercial hub Dubai, over investments in banking, infrastructure and logistics to diversify its economy.

“Bahrain cannot afford social and political problems at this moment,” Husain said.

Bahrain’s parliament, in which Al-Wefaq has 17 out of 40 seats, only approved the government’s 2009-2010 budget in March after tussling for months over government social spending.

The delay threatened to slow outlays and delayed the issuance of government bonds to finance the country’s fiscal deficit and spending on housing projects.

In 1995, Shi’ites led a series of violent protests to demand reforms. The disturbances abated in 1998 after King Hamad bin Isa al-Khalifa launched landmark political and economic reforms, including pardoning political prisoners and activists in exile.

Unlike most other Gulf Arab states, Bahrain has a lively parliament, consisting of an elected lower house and an upper house whose members are appointed by the king. (Reporting by Frederik Richter and writing by Inal Ersan; Editing by Thomas Atkins and Sophie Hares)