* Court cases deadlocked by block on Kurdish defence
* Talks underway to end 28-year-old insurgency
* Kurdish MPs visit to Ocalan delayed by Erdogan spat
* Pro-Kurdish party says law falls short of demands (Adds EU's Fuele, BDP comments, defendant uses Kurdish in Diyarbakir)
By Daren Butler
ISTANBUL, Jan 25 (Reuters) - Turkey's parliament has passed a law allowing defendants to use Kurdish in court, but Kurdish politicians said it fell short of their demands as the EU candidate country seeks to advance peace talks with the jailed leader of a 28-year-old insurgency.
Kurdish and nationalist deputies clashed verbally and nearly came to blows during a tense debate over the bill late on Thursday seen aimed at breaking a deadlock in trials of hundreds accused of links to Kurdistan Workers Party (PKK) militants.
Courts have rejected suspects' efforts to use Kurdish in defence against charges of membership of a PKK umbrella group. The law allows defendants to speak in their mother tongue, if they speak it better than they do Turkish.
In an immediate sign of the law's application, a court allowed Batman Mayor Nejdet Atalay to defend himself in Kurdish at his trial in the southeastern city of Diyarbakir.
EU Enlargement Commissioner Stefan Fuele welcomed the law.
"This is an important step towards having a broader access to public services in mother tongue. Looking forward to a rapid implementation," he said in comments emailed to Reuters.
The law was among the demands of hundreds of jailed PKK rebels who late last year staged a hunger strike which was ended by the intervention of their leader Abdullah Ocalan, in prison on the island of Imrali, south of Istanbul.
Ocalan's intervention is viewed as having paved the way for peace talks aimed at ending a conflict in which more than 40,000 people have been killed since his rebels took up arms in 1984.
Intelligence agency officials have held talks with Ocalan, establishing a framework for a deal under which the PKK would stop fighting, withdraw from Turkish soil and disarm. In return, the government would boost Kurdish minority rights.
Only Prime Minister Tayyip Erdogan and a few officials are believed to have first-hand knowledge of the peace framework. They have not disclosed details of it but have also not denied press reports on it reported by media close to the government.
With next year's local and presidential elections in mind, Erdogan is keen to keep the process under wraps due to fears of a nationalist backlash among voters and within the state against talks with a man reviled by most Turks.
KURDISH PARTY SAYS LAW INADEQUATE
Deputies from Erdogan's ruling AK Party and the pro-Kurdish Peace and Democracy Party (BDP) voted in favour of the new law, while other opposition deputies voted against.
The BDP was still critical however of the law's requirement that defendants speaking their mother tongue pay for a translator.
Idris Baluken, a deputy BDP leader, also complained the law only allowed Kurdish twice during spoken defence in court and not in written defence or during the pre-trial investigation.
"We want to make clear that this bill does not satisfy the BDP, or our people," he said in comments on the BDP website.
Under the peace moves, Kurdish politicians have also visited Ocalan. A second visit was expected this week but a verbal spat between them and Erdogan is believed to have delayed the talks.
Kurdish politician Ahmet Turk last week condemned attacks by Turkish warplanes on PKK targets in northern Iraq, drawing a strong rebuke from Erdogan who has vowed operations against the militants will continue until they put down their arms.
Despite the peace efforts, Erdogan has remained fierce in his public criticism of the BDP, accusing them of acting in line with the PKK, with whom they share the same grassroots support.
However Erdogan's appointment of a new interior minister, from Mardin in the mainly Kurdish southeast, in a cabinet reshuffle was seen boosting efforts to advance the process.
The outgoing nationalist minister was disliked by Kurds and his successor might be a positive factor if he plays a more constructive role, said Finansbank chief economist Inan Demir.
"We think the successful resolution of Turkey's age-old Kurdish conflict could significantly reduce Turkey's risk premium and it would constitute the ultimate argument for re-rating Turkish economy and assets," Demir said.
The PKK, designated a terrorist group by Turkey, the United States and the European Union, seeks autonomy for the country's Kurdish minority, estimated to number some 15 million. (Additional reporting by Claire Davenport in Brussels; Writing by Daren Butler; Editing by Jon Boyle)