* Ocalan believed to have full backing of militants
* Conflict a brake on Turkey's democratic ambitions
* PKK also said to be in talks in northern Iraq
* Erdogan under pressure to make fast progress
By Daren Butler
ISTANBUL, Feb 7 (Reuters) - Sitting across the table from top Turkish officials, jailed Kurdish rebel leader Abdullah Ocalan wields the power to silence guns across southeastern Turkey which have killed more than 40,000 people in a three decade-old insurgency.
Reviled by most Turks and held in virtual isolation since his 1999 capture, the Kurdistan Workers Party (PKK) leader has expressed in fledgling peace talks with Ankara a will to end a conflict which both sides realise they cannot win militarily.
A similar resolve in Ankara amid a winter lull in violence has created an unprecedented opportunity to end fighting which has inflicted massive human and economic costs, and has long undermined Turkey's democratic ambitions.
But both sides face major challenges to meet their end of the bargain.
Looming elections next year and the growing risk of renewed clashes as summer approaches mean Prime Minister Tayyip Erdogan will need to initiate reforms swiftly to widen Kurdish minority rights and enable the rebels' reintegration into society.
In return, Ankara hopes Ocalan will set in motion steps towards a militant ceasefire and withdrawal from Turkey in the coming weeks. First he will need to win over battle-hardened PKK fighters in the mountains of northern Iraq.
Comments from Kurdish politicians and PKK commanders based in Iraq's Qandil mountains suggest Ocalan can do just this.
"If Ocalan is convinced, those in Qandil will be convinced. Those in Qandil could not and would not resist an Ocalan who is clearly determined," said Cengiz Candar, author of a think-tank report on ending the conflict.
The talks have been kept under wraps for fears of a nationalist backlash, but media close to the government have outlined a process under which the PKK will halt hostilities, withdraw from Turkey within months, before ultimately disarming.
Ocalan, isolated on the prison island of Imrali near Istanbul, will need to be able to communicate with Qandil and offer them strong incentives to pull out around 2,000 fighters believed to be in Turkish territory.
"Ocalan is no doubt the person who knows his own group the best," said Sahismail Bedirhanoglu, head of a business association in the mainly Kurdish city of Diyarbakir who heads a contact group aimed at fostering dialogue on Kurdish issues.
"(The state) must create channels via which Ocalan can talk to the PKK ... or the talks will not have legitimacy."
Ocalan was seized by Turkish special forces in Kenya in 1999, brought back to Turkey, tried and sentenced to hang. The sentence was later commuted Ocalan dispatched to Imrali.
The PKK, designated a terrorist group by Turkey, the United States and the European Union, took up arms in 1984 with the aim of carving out a Kurdish state in southeast Turkey. Subsequently it moderated its stated goal to autonomy, but it is unclear what sort of deal Ocalan would now accept.
Issues in the talks are likely to include steps towards decentralisation, Kurdish language education, constitutional changes to improve equality and reform of an anti-terror law under which thousands of people have been jailed for links to the PKK.
Parliament has made only slow progress on constitutional changes and Erdogan has vowed to present his own reform plans in March if there is no cross-party agreement.
ERDOGAN'S BALANCING ACT
The current momentum for a solution has in part been driven by last year's escalation in fighting between the PKK and NATO's second-largest army. Fears of more bloodshed have brought public opinion, Turkish and Kurdish, behind the process.
"There are funerals every day. Really the mothers cannot bear it anymore. We don't have the strength for it," said Esma Seydioglu, tugging her black headscarf as she described her sons who joined the PKK - one killed in a clash and one in prison.
"We want peace after this. No more of our people should die, no more of our children, no more soldiers, no more police, no more guerrillas," she said, sitting in a small office in Diyarbakir in southeast Turkey.
Erdogan himself has described "halting the mothers' tears" as the goal of the current process, but he is wary of inflaming nationalist anger over talks with Ocalan, a man often described by Turkish media in the past as the "baby killer".
His caution is illustrated by his repeated insistence that it is the intelligence agency in talks with Ocalan and not the government, despite the agency being under his direct authority.
"As the government we can't say 'come on Ocalan let's sit down with you and negotiate'. If we say that the nation wouldn't forgive us," Deputy Prime Minister Bulent Arinc said on Monday.
In a sign of a rocky path ahead, a row has emerged in the last couple of weeks over the make-up of a Kurdish delegation set to visit Ocalan, with Erdogan rejecting the inclusion of MPs filmed embracing PKK fighters last August.
Mixed signals which Erdogan himself has sent out in recent months have fuelled distrust among Kurdish politicians with denials that there is a "Kurdish problem".
From an expression of regret that the lifting of the death penalty had spared Ocalan from execution in 1999, to a call to lift Kurdish politicians' immunity from prosecution, Erdogan has often alienated those he is now seeking to win over.
The result is a climate of mutual suspicion which was exacerbated last month when Turkish warplanes bombed PKK targets in northern Iraq, drawing condemnation from Kurdish politicians.
"The two sides do not trust each other," said Hugh Pope, Turkey project director for the International Crisis Group.
"There needs to be a trust-building phase. For a start they need to stop attacking each other."
FROM OSLO TO ARBIL
Ankara previously held secret talks with the PKK in Oslo which fell apart in 2011 amid renewed violence in southeast Turkey. The risk of the latest negotiations meeting a similar fate will grow if the talks drag on.
Commentator Avni Ozgurel, who has followed the process closely, said Oslo had not been in vain and top PKK commander Murat Karayilan had voiced his commitment to the Oslo process.
"This process showed that, contrary to expectations, the PKK had a strong desire for peace," Ozgurel said.
While attention is focused on Ocalan, there is also evidence of talks in the city of Arbil in northern Iraq, where Iraqi Kurdish leaders are expected to play a role in the process.
"It is not just Ocalan in this process. Maybe it is not highlighted, but people representing the PKK leadership are frequently discussing details with MIT (Turkish intelligence agency) operatives from Ankara in Arbil," Ozgurel said.
The militant group itself has officially denied such talks.
Outlining the process, Ozgurel forecast that initially there would be a symbolic withdrawal of fighters to northern Iraq, with the PKK ordering its fighters to halt attacks.
"If this agreement functions without problems, the group will announce a ceasefire decision in May. Disarmament will come later," he said.
While Ocalan commands the loyalty of the PKK, the prospects of disarmament could still be undermined by the emergence of splinter groups. The picture is further complicated by the Syrian conflict, which has enabled a PKK proxy party to assert its authority in parts of northern Syria.
Erdogan, who has pushed through cultural and language reforms for Turkey's 15-million strong Kurdish minority during his decade in power, does not have time on his side.
Turkey faces local and presidential elections next year and his government is currently seeking ways to push through parliament a constitution which would enable Erdogan to take charge of a new executive presidency.
There is also a risk of sabotage, with last month's killing in Paris of three Kurdish women activists, including a PKK co-founder, seen by many as such an attempt.
"If dead bodies continue to arrive, who will believe in this process?" said Raci Bilici, Diyarbakir head of the Human Rights Association.
"We will not be able to solve anything in the Kurdish problem with weapons, violence, clashes and security measures." (Writing by Daren Butler; Editing by Nick Tattersall and Ralph Boulton)