By Ulf Laessing

ADDIS ABABA (Reuters) - Germany has called off a conference next month to drum up investment for Sudan after its embassy in Khartoum was stormed in protests against a film that insults the Prophet Mohammad, Sudanese officials and diplomats said on Thursday.

The move is a blow for Sudan which has been trying to attract investment to help overcome an economic crisis worsened by the loss of most of its oil reserves when arch-foe South Sudan declared independence in July 2011.

Germany, one of the few Western countries with good ties to Khartoum, had planned to host a conference in mid-October to foster economic cooperation with Sudan, according to diplomats.

The event, scheduled to be held in Germany, would have been a rare chance for Khartoum to meet Western firms reluctant to invest in the African country due to a U.S. trade embargo, weak laws and corruption.

Diplomats said Berlin decided to shelve the event after protesters set the German embassy on fire on Friday to demonstrate against the film which depicts the prophet as charlatan and womanizer.

Protesters had also targeted the U.S. and British embassies.

The German Foreign Ministry declined to comment on the conference specifically, but a spokeswoman said its embassy in Khartoum was unable to function as normal due to the damage it suffered during the demonstrations.

UNDER PRESSURE

Western diplomats in Khartoum said Germany was surprised Sudan had criticized it for allowing protests last month by right-wing activists carrying a caricatures of the prophet.

The country had also criticized Chancellor Angela Merkel for giving an award in 2010 to a Danish cartoonist who depicted the prophet in 2005, triggering demonstrations across the Islamic world.

Sudan's President Omar Hassan al-Bashir is under pressure from Islamists who feel the government has given up the religious values of his 1989 Islamist coup.

Sudan's Foreign Ministry said Berlin had informed it the conference would be postponed indefinitely.

"Both sides will announce a later date," it said in a statement.

On Wednesday, Foreign Minister Guido Westerwelle sent a senior diplomat to Sudan to discuss security issues and "conditions for relations between the Sudan and Germany," according to a statement.

Diplomats said Germany had planned the Sudan investment conference on its own, so it would not have to rely on other Western powers which often criticize Khartoum for a campaign against rebels in two southern border states.

In March, Norway and Turkey had called off a similar investment conference after the United States signaled it would not participate due to Sudan's human rights record.

Western powers shun Bashir who was indicted by the International Criminal Court over war crimes in Darfur, scene of a nearly-decade old insurgency.

(Additional reporting by Khalid Abdelaziz in Khartoum and Alexandra Hudson in Berlin; Editing by Sophie Hares)




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