By Angus McDowall
DUBAI (Reuters) - The death of Saudi Arabia's Crown Prince Sultan sets the stage for an eventual generational shift in the aging leadership of the world's top oil exporter, even if King Abdullah picks 77-year-old Prince Nayef to succeed him.
At stake is the direction of a U.S. ally attempting to reconcile its conservative traditions with the needs of a modern economy and a young, increasingly outward-looking population.
Saudi Arabia, which dominates world oil markets and holds profound influence over Muslims through its guardianship of Islam's holiest sites in Mecca and Medina, faces turbulence in its neighbors and a confrontation with regional rival Iran.
King Abdullah appears set to appoint veteran Interior Minister Prince Nayef as crown prince and heir, but his choice of a defense minister to replace Sultan, who died in New York on Saturday, may signal how the conservative Islamic state manages the transition to its future leaders.
King Abdullah, Sultan and Nayef have run the country since the late King Fahd fell ill in 1995, but the monarch is in his late 80s and has spent three months abroad this year recovering from a back problem that again required surgery last week.
He remains firmly in control of the kingdom, but the focus will increasingly fall on Nayef and some younger princes.
Chief among them is Prince Salman, the Riyadh Governor who is a full brother of Sultan and Nayef and is seen as next most important in a ruling family that has prized seniority since it was founded by King Abdulaziz Ibn Saud in 1932.
"This all points to the key role of Prince Salman, who sooner or later will move up to crown prince," said a former diplomat to Riyadh who wished to remain anonymous.
"He will be the one who really decides whether the succession will stay horizontal among the sons of Ibn Saud or go vertical to one of the grandsons."
If the enigmatic Nayef becomes crown prince, his character will shape for years to come the way Saudi Arabia tackles a host of challenges at a time of unprecedented change, both for the kingdom and the wider Middle East.
"Nayef had some time with Sultan's long illness to run himself in as crown prince and he has acted on behalf of the king," said another former diplomat. "He has become acquainted with authority across the board."
To Saudi liberals, Nayef represents the stern face of the conservative establishment: opposed to any moves toward democracy or women's rights, a supporter of the religious police and the veteran head of an Interior Ministry that locks up political activists without charge.
"I'm very worried that Prince Nayef will be the next crown prince," said a 47-year-old woman who did not give her name. "I fear that reform plans will not go forward if he takes power."
Nayef was quoted soon after the September 11, 2001 attacks on the United States as doubting that any of his compatriots had been involved when 15 of the 19 hijackers were in fact Saudis.
However, former diplomats, local journalists and royal family members who have dealt with him paint a softer portrait of a man at the center of Saudi politics for over three decades.
"Many things are said about Prince Nayef, but I find him to be a very kind man with a foot on the ground by meeting people," said Khaled al-Maeena, editor at large of the Arab News daily in Jeddah. "He has the pulse of the nation."
Reforms enacted by King Abdullah have aimed to strengthen private sector growth and loosen the grip of conservative clerics on the education system and judiciary.
"I don't think the gloom and doom about Nayef is justified," said the former diplomat. "You have to realize that Saudi Arabia is run by a coalition. It's not an autocracy run by one man."
During the long illness of Sultan and absences of the king, Nayef stood in for his elder brothers, meeting world leaders and managing the kingdom's day-to-day affairs.
"I don't think there will be a substantial change of direction," said Hossein Shobokshi, a columnist for the state-owned news channel Al Arabiya. "The country has always opted for the non-surprising method. So we don't see any big decisions in policy."
People familiar with him also point out that, as interior minister, Nayef interacts with normal Saudis more frequently than any other senior prince, dealing with the problems of individual citizens in matters ranging from crime to poverty.
The simultaneous changes of both the crown prince and defense minister might prompt a wider cabinet reshuffle, said analysts, although Abdullah's actions might be constrained by the need to maintain a balance between senior princes.
"Doing a cabinet reshuffle in Saudi Arabia is like Sudoku," said an analyst who asked not to be named because of the sensitivity of the subject. "You think you have solved it and then, whoops, the nine is in the wrong place."
Two possible candidates for the Defense Ministry are Prince Khaled bin Sultan, who has been his father's deputy there since 2001, and Prince Salman.
The choice of a son or grandson of Ibn Saud will indicate how quickly the Saud family plans to transfer power to a younger generation of princes who have long jockeyed for position.
Last year King Abdullah gave up his role as head of the National Guard to his son, Prince Miteb. Nayef's son, Prince Mohammed, has long been tipped to succeed him as interior minister.
As condolences came in from figures as diverse as Hamas leader Khaled Meshaal and U.N. Secretary-General Ban Ki-moon, King Abdullah was expected to summon the Allegiance Council, a family body he set up in 1996 to regulate the succession.
Two council members, Prince Salman and Sultan's son and Deputy Defense Minister Prince Khaled bin Sultan, were expected to return with Sultan's body from New York on Monday night.
Sultan's funeral will be held on Tuesday before the afternoon prayer in the conservative Islamic state and his body will then be taken away for burial.
A guest list had not been released on Monday afternoon.
"The name (of his successor) hasn't been announced yet because this time we have a procedure called the Allegiance Council," said Jamal Khashoggi, head of a new television news channel set up by Saudi billionaire Prince Alwaleed bin Talal.
"The king wants to go through this procedure and is waiting for Prince Salman and Prince Khaled bin Sultan to come back to Riyadh."
It would be the first time that the untested council has been used to approve a king's choice of crown prince, a reform Abdullah introduced to ensure an orderly succession in a ruling family that has thousands of members and dozens of branches.
Royal succession does not move directly from monarch to offspring, but has passed down a line of brothers born to the kingdom's founder King Abdulaziz Ibn Saud, who died in 1953.
(Additional reporting by Asma Alsharif in Riyadh; Editing by Alistair Lyon)