By Lada Evgrashina

BAKU (Reuters) - Azeri police used tear gas and water cannon on Thursday to disperse hundreds of protesters demanding the resignation of a regional leader, the day after cars were torched and a hotel set ablaze in a night of rioting.

Nizami Alekperov, Ismailli regional governor, rejected protesters' demands, but complaints about wages, unemployment and oppressive government in the oil-producing country may send a worrying signal to President Ilham Aliyev in an election year.

Reuters television footage showed at least one building on fire and the burning carcasses of vehicles set ablaze by up to 3,000 rioters on Wednesday night in the town of Ismailli, 200 km (125 miles) northwest of Baku.

Witnesses said hundreds of protesters regrouped in the town of 21,000 on Thursday and surrounded the governor's residence, shaking their fists and chanting "Resignation! Resignation!"

"We are tired of unemployment, poverty and an atmosphere of fear," one protester, who declined to be identified, told the Azeri Turan news agency.

Reuters footage showed several protesters throwing stones at riot police and barring a street with steel pipes.

Turan quoted witnesses as saying the demonstration only subsided after tear gas, rubber bullets and water cannon were used. Police, who brought in reinforcements, said some of their number were injured along with some protesters.

Wednesday night's unrest started as a brawl involving a local hotel owner who crashed his car, and rapidly spiraled into a riot involving up to 3,000 people, according to a Reuters witness and Turan.

Rioters mobbed the driver's hotel, setting fire to it and torching cars in the courtyard, before moving to the home of Alekperov's son where a car and two motorcycles were set ablaze.

The speed with which violence spread in the small town spoke to the complaints residents have of corruption, an overbearing local government and an increasing divide between rich and poor that has become endemic in the oil and natural gas-rich country.

BAKU RALLY

Young Azeri opposition activists spread a message via Facebook on Thursday calling for a Baku protest on Friday in support of Ismailli residents.

Speaking to journalists, Ismailli governor Alekperov said he would not bow to demands for him to step down.

"I won't resign on the demands of five or 10 people ... It's inadmissible to make a political conflict out of a car accident and a quarrel between two people," Alekperov told reporters.

Police usually move in swiftly to quash protests which are rare outside of Baku, capital of the U.S. ally nation located on the Caspian Sea between Russia and Iran.

The former Soviet republic supplies oil and gas to Europe and serves as a transit hub for U.S. troops based in Afghanistan - a role its critics say limits Western powers' willingness to sanction Azerbaijan for human rights abuses.

(Writing by Margarita Antidze; Editing by Thomas Grove and Sophie Hares)