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* Communist party jumps to 2nd in polls, wins in regions
* Regional election win prompts strongest protests since '89
* Fears rise over what Communists can do with new-found power
By Jason Hovet and Robert Muller
PRAGUE, March 1(Reuters) - Before the fall of communism, Vaclav Sloup trained the soldiers who caught thousands trying to flee across Czechoslovakia's fortified border to West Germany.
Today, he helps power a Czech communist party that has surged to second place in polls, tapping anger over poverty and graft. But rivals' rejection of any alliance with a party they see tainted by trappings of the Cold War era threatens to hamper future formation of governments able to manage a frail economy.
When communism collapsed in 1989, the once-dominant party was slow to yield up the reformist wing that emerged in other east European countries. While statues of Lenin have vanished, party lawmakers still greet one another with "comrade" and maintain hardline foreign policy views such as leaving NATO.
The Communist Party of Bohemia and Moravia (KSCM), for all its protests that it has reformed, remains a pariah in Czech politics, but a pariah commanding now a 20 percent vote.
Sloup's rise to become education councillor in the northern region of Karlovy Vary has aroused protests by students and former dissidents that demonstrate the strength of emotion, but the 63-year-old refuses to quit because of his past.
"I carried out my duties when Europe was divided by an Iron Curtain, and it was in accordance with laws of the time," he said. "I have nothing to be ashamed of."
Sloup is hardly alone. Protests in the South Bohemia region have already forced two Communist councillors to resign, one of them also a former border guard and secret police informant.
"The Communist party is antidemocratic," said David Pithart, a 47-year-old environmental consultant, whose father Petr was a leading dissident and served as Czech prime minister in 1990.
"The party doesn't know how to govern any other way," he said while at a protest in Ceske Budejovice in December.
The communists have jumped past ruling conservative parties to second place in surveys and would be a prospective partner for the poll-leading opposition centre-left Social Democrat party (CSSD) after a 2014 general election.
Social Democrat leader Bohuslav Sobotka now talks openly about prospects of forming a minority government backed by Communists. He wants to avoid a repeat of 2010 when his party won the most votes but could not find a partner that would allow it to form a government.
Any cooperation, however, would require ending a 1995 ban on government-level cooperation with the Communists.
The Social Democrats will debate this controversial issue at a national congress on March 15-16, and many delegates may yet shrink from any close political contact.
Should they refuse to deal with the Communists, the country would most likely face an awkward coalition of left and right parties that could stall policymaking
"There is still a Communist party running in elections and getting real support. We can't behave like they are not democratic," said Jiri Dienstbier Jr., 43, a party deputy chairman who was active in the 1989 anti-Communist movement and whose father was once jailed with Vaclav Havel for dissent.
A Social Democrat and Communist alliance could undo some of the health and pension reforms -- that are unpopular for many voters -- carried out by Prime Minister Petr Necas's centre-right cabinet since taking power in 2010.
There are broader implications for the political culture.
In the longer term, an easing of the taboo could shift Czech politics to the left, allowing a political consolidation and ending years of unstable rule where cabinets with a shaky power base were repeatedly unable to push through their full agenda.
Necas, speaking from the centre-right, has called the communist party "unreformable".
The communists' return has given rise to soul-searching for many beyond the ranks of party politics in the central European country of 10.5 million.
Protests kicked off after the Communists won spots on governing councils in the majority of the country's 13 regions in October regional elections, gaining 20.4 percent of the overall vote versus 12.3 percent for Necas's Civic Democrats.
So far protests are mainly over fears of what the Communists might do as they have yet to unveil any sweeping policy change.
Sitting under a portrait of Karl Marx, Communist party Deputy Chairman Jiri Dolejs said the party had apologised repeatedly for repressions of the communist era but may yet need to make another gesture to link up with the Social Democrats.
"We are now the closest to a coalition in 23 years," he said from his office in the party's massive, nondescript headquarters, which sits on Political Prisoners Street, named to commemorate the victims of Nazi occupation during World War Two.
The Communist party's views on international politics is the most striking difference it has with the Social Democrats. Both win votes with pledges to raise welfare benefits, keep higher education free and raise taxes on big corporations.
The Communists, however, are mostly untouched by sleaze scandals that have hit established parties.
"They are holding their image of an uncorrupted party. That has secured them lasting popularity," said Rudolf Kucera, editor of political science magazine Stredni Evropa Revue.
Some opponents may reason that giving Communists more power and drawing them into the mainstream may dent the appeal of a party that once wielded power with use of a hardline secret police and, in 1968, the backing of Soviet tanks.
For some, those harsh aspects of communist rule have given way to rosier memories of a system that for all its darker aspects offered job security, cheap housing and low-cost food.
Those memories are growing stronger, especially among pensioners and blue-collar workers, while the country suffers the longest recession of its post-communist history, having contracted since mid-2011 due to state spending cuts.
Since 1991, the average wage is up six-fold, to $1,300 a month, but a pension of $570 leaves many retirees wanting.
A January STEM survey found that just 46 percent of people felt today's system is better than communism, a 21-year low.
"After almost a quarter of a century the (Communist) stigmatisation is not so strong any more," said Dolejs, an economist who joined the Communist party in January 1989.
For Petr Brany, the Communist party head in the South Bohemia region and another former border patrol officer, there is nothing to be gained from blackening the past.
"Woe to a nation that wants to erase 41 years of its history and is ashamed of it," he said.
GOOD OLD DAYS
Communist leader Vojtech Filip, who joined the party in 1983, says the party takes only the best things from the past.
The party's message is reaching a wider audience. Michal Kostka joined at the age of 18. Last year, at 23, he was elected as the youngest Communist regional representative and wants to fight against rising unemployment and expensive housing.
"Our party has a lot to offer to young people," he said.
The Social Democrats may find themselves with no option but to break the taboo when they decide whether to ask the party for its support after 2014 national elections.
"The Social Democrats will have to face this question," political analyst Jiri Pehe said, "and I think it will be a turning point in Czech politics."
On this, Sloup would agree.
"It is not just disillusionment and disappointment with the current government," Sloup said. "Since 1990, KSCM has had enough time to prove it has made up for its past and is now a democratic party."
(Editing by Ralph Boulton)