By Joseph Akwiri

MOMBASA, Kenya (Reuters) - Kenyan police arrested the leader of a coastal separatist group and shot dead two of his supporters in a dawn raid on Monday, part of an escalating crackdown on the movement that has threatened to disrupt next year's election.

The Mombasa Republican Council's campaign for the secession of Kenya's Indian Ocean coastal strip, a tourist hotspot and trade hub, is just one of the concerns ahead of the March election, the first since the 2007 vote after which some 1,200 people were killed and thousands displaced in tribal violence.

Dozens of youths, armed with machetes and clubs, attempted to prevent police detaining MRC leader Omar Mwamnuadzi in Kwale, 20 km (12 miles) south of the port city of Mombasa, and were also arrested, provincial police chief Aggrey Adoli said.

"After the leader's arrest, youth who are MRC sympathizers attacked and killed a local official in retaliation so we are talking about a total of three people dead," Adoli said.

A Mombasa court later charged Mwamnuadzi with possession of fire arms and incitement to violence. Mwamnuadzi and 36 others appeared in the crowded court room, most of them limping, nursing facial injuries, and with blood stained clothes.

"The accused, without reasonable excuse were jointly found in possession of offensive weapons namely fire arms, four petrol bombs, three swords, six knives, four arrows, two bows, a spear and eight machetes, and raised reasonable presumption that the weapons were to be used in a manner prejudicial to public order," the charge sheet read.

Mwamnuadzi, his face swollen and covered in dry blood, was seen earlier being escorted out of a police cell in blood-stained clothing. He had to be supported as he was lifted into a police truck.

The MRC leader faced two further charges of being in possession of materials printed with messages that called for secession and which implied it was desirable to break the law.

All 37 denied the charges.

Kenya's government said last week it had information that the MRC intended to sow chaos during national school exams that began on Monday.

"These are not threats to take lightly. That is why you are seeing these crackdowns and they will not stop until we have dealt completely with the threat," Internal Security Minister Katoo Ole Metito told local lawmakers and security chiefs in Mombasa. "There will be peaceful elections in Coast and our (school exam) candidates will sit exams in peace."

GRIEVANCES

The MRC's grievances stem from what it calls decades of social and economic marginalization of the people in the coastal region of Kenya, east Africa's largest economy.

Over the weekend Mohammad Dor, a legislator and prominent Muslim cleric from the region, accused the Nairobi government of harassing the MRC, which he said had legitimate grievances.

"What is wrong with funding MRC? These are people with genuine concerns. I am willing and ready to fund them if they approach me," he told reporters in Mombasa, the region's biggest port and main city.

Kenya's coastline is a magnet for foreign tourists and jewel of the economy with its white sand beaches and turquoise waters, while Mombasa is a critical commercial center for Kenya and export outlet for its landlocked neighbors.

Dor spoke a few days after the government said it was investigating three politicians and two businessmen it believed were funding the MRC.

Another senior MRC official, Mwero wa Mwadadu, said police had beaten up numerous supporters during Monday's dawn raid and he denied that the group intended to disrupt the school exams.

"They have been looking for us (and) framing us for crimes we haven't committed," Mwadadu told Reuters. "We mean peace. We don't mean to disrupt exams, those are false allegations, but what we don't want are elections in coast."

Earlier this month MRC spokesman Mohamed Mraja and secretary Randu Nzai Ruwa were charged with inciting members to disobey the law, shortly after a gang of youths brandishing machetes attacked a cabinet minister and killed his bodyguard.

Police linked the attack to the MRC, but the group denied involvement.

(Writing by Richard Lough; Editing by Yara Bayoumy)