By Jan Lopatka

PRAGUE (Reuters) - Czech President Milos Zeman is taking advantage of a political crisis to expand his powers, infuriating lawmakers who accuse him of undermining parliamentary democracy and jeopardizing the stability that has long made Prague a safe haven for investors.

Zeman won the Czech Republic's first direct presidential election in January and since then has gone further than his predecessors - who were both chosen by parliament - in testing the limits of a role viewed hitherto as largely ceremonial.

"Do not expect me to be a clerk who will come to the (presidential) Castle... and thoughtlessly sign what is laid on the desk before him," the burly leftist told parliament in May.

Zeman defied all the main political parties last month by asking a leftist ally, Jiri Rusnok, to head a new Czech government following the resignation of center-right prime minister Petr Necas in a spying and bribery scandal.

On Monday, prosecutors asked the lower house of parliament to lift Necas's immunity to allow for his criminal prosecution.

Rusnok has little chance of winning a vote of confidence in parliament but he could stay in office for months with Zeman's backing, raising the possibility of political paralysis and even of a constitutional crisis if no side backs down.

A Rusnok government would allow Zeman to push his own political agenda, which includes large public investments, higher taxes and adoption of the euro. Zeman also favors closer business links with Russia.

A lengthy standoff between president and parliament could dent the Czech Republic's hard-won credibility on international debt markets, where investors have seen it as a safe haven among emerging markets. Political instability, along with any signs of renewed jitters in the euro zone, could divert funds elsewhere.

Czech markets have so far kept a cautious eye on the political maneuvering but have not reacted strongly.

POWER SHIFT?

Under the Czech constitution - which is loosely worded in many places - Zeman can pick whoever he wants as prime minister.

His predecessors Vaclav Havel and Vaclav Klaus always chose candidates accepted by the main parties in parliament but Zeman, armed with a direct popular mandate after winning 2.7 million votes in January's poll, does not feel bound by that tradition.

"If there is no screaming now and further steps follow, we could end up with a large shift toward a limited role for parliament and the strengthening of the president," said Petr Kambersky, commentator at daily Hospodarske Noviny.

Popular demand drove the Czech switch to direct presidential elections amid frustration with the horse-trading that prevailed when parliament appointed the head of state.

Clashes between different arms of government and accusations of flouting the rules are hardly new in central Europe, where more than two decades after the fall of communism democratic traditions remain less firmly rooted than in western Europe.

In neighboring Hungary, for example, Prime Minister Viktor Orban has come under fire from the European Union for increasing his government's powers under a constitutional overhaul.

Zeman, a chain smoker also known for his love of a tipple, has not faced criticism from Brussels, though he received a rare if diplomatically-worded warning not to go too far from German President Joachim Gauck, a strictly ceremonial head of state.

"You stand now before the attractive and at the same time difficult task of defining the president's role according to your direct mandate, without thereby creating a second center of power in the country," Gauck told Zeman in Berlin on June 26.

The Czech constitution is sometimes vague on institutional limits. Some say it allows the president to fire prime ministers at will, an option Zeman has touched on, though he has also said this would be based on a "very extensive" interpretation.

Zeman started testing how far he can go soon after taking office in March. He refused to approve ambassadors proposed by the cabinet and then briefly blocked a professorship to a gay academic, saying he disliked the candidate's public activism.

CZECH LEFT SPLIT

The appointment of Rusnok angered the outgoing coalition, which says it should have been given the chance to form the next cabinet on the basis of its parliamentary majority.

Miroslav Kalousek, deputy chief of the conservative TOP09, has called Zeman "Gosudar", a title used for Russian tsars, and compared him to Russia's President Vladimir Putin.

Zeman's actions have also split the center-left Social Democrats, the party he led as prime minister in 1998-2002.

Zeman broke his ties with the party in 2003 saying he would retire to his summer home and become a "political pensioner" after it failed to support his first presidential bid.

In 2009, his followers set up the leftist "People's Rights Party - the Zemanites".

Polls show the party may be nearing the 5 percent threshold to win seats in the next election, due in May next year, taking part of the leftist vote from the Social Democrats.

This poses a threat to Social Democrat chief Bohuslav Sobotka. He has difficult relations with Zeman, having been among those who blocked his way to the presidency in 2003.

A stronger Zeman may be an obstacle to Sobotka's ambition to become prime minister after the next election.

If Rusnok does not win a vote of confidence expected in about a month, Zeman is meant to appoint another prime minister. But there are no time limits and politicians fear Zeman could drag out the process, leaving Rusnok's team in place for many months to carry out the president's wishes.

The parliament could threaten to clip Zeman's powers through a constitutional change or by voting to dissolve itself, thus forcing an early election. But the parties lack sufficient support for either course of action.

(Editing by Gareth Jones)