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By Angus McDowall

MANAMA (Reuters) - Bahrain's government and opposition held reconciliation talks on Sunday for the first time since July 2011 to try to end two years of political deadlock in the strategically vital Gulf Arab island kingdom.

Home to the U.S. Fifth Fleet, the tiny state has been hit by unrest since mass pro-democracy protests in early 2011, becoming a front line in a region-wide tussle for influence between Shi'ite Muslim Iran and Sunni Arab states such as Saudi Arabia.

The mass disturbances were crushed but demonstrators drawn mainly from Bahrain's Shi'ite majority have continued small protests on an almost daily basis demanding the Sunni ruling family call elections and create a constitutional monarchy.

While opposition members have expressed very cautious optimism that the talks represent a meaningful step forward, they have also voiced concerns that the agenda remains unclear.

Before Sunday's gathering, which broke up after more than three hours, Khalil Ibrahim, a senior official of the main opposition Wefaq movement, said Wefaq would decide on Monday whether to continue with the dialogue.

Wefaq has commanded nearly half the electorate in past parliamentary votes but the government has refused to budge on opposition demands to give the elected chamber of parliament the power to form cabinets.

Opposition negotiator Abdulnabi Salman, from the Democratic Progressive Tribune group, told reporters after the session: "So far so good, and we will continue for the next session, but there is no guarantee that we will continue forever."

He said the gathering had not yet set an agenda and opposition groups would discuss the way forward on Monday.

Asked if he thought government negotiators had showed they were serious, Salman said: "Not yet. For me they didn't show us that... But they showed us that they can listen to us, which is a positive step."

Justice Minister Sheikh Khaled bin Ali al-Khalifa told journalists that the session had been a positive start and it "confirmed the importance of this dialogue".

The opposition walked away from reconciliation talks in July 2011, saying they were not carried out fairly.

AGENDA

"We hope we can reach in the first sessions a good agenda that will be acceptable to all," said Samira Rajab, Bahrain's information minister, before the session.

Of the 24 other participants, eight will be from the opposition, eight from pro-government parties and eight from Bahrain's national assembly, made up of the appointed Shura Council and an elected chamber.

"The issue in this country is between the government and the opposition. They are the real stakeholders. But there are lots of others who will sit around the table," said Jasim Husain, a former Wefaq member of parliament.

During the 2011 talks, opposition members complained that Wefaq was given only one out of 60 seats in the dialogue, the same number as very small pro-government parties.

SPLITS

The government has accused the opposition of acting on behalf of Tehran, which has denied the accusation.

Opposition and human rights activists fault the government for what they describe as severe sentences for protesters and the violent tactics used to suppress demonstrations.

About 35 people died during the 2011 unrest and in the two months of martial law afterwards, according to an independent commission of inquiry, but the opposition says at least 80 died.

The government points to its record in implementing some reforms to the police and judiciary, increasing powers for the elected parliament and appointing an independent inquiry that criticized the country's response to unrest.

But opposition figures have said these are cosmetic, since they do not curtail the ruling family's grip on ultimate power.

The opposition has said its main conditions for continuing the talks are that ruling family members attend, that the talks bring about decisions rather than recommendations, and that the result is put to a public referendum.

(Reporting By Angus McDowall, Editing by William Maclean and Richard Meares)

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