By John Irish and Hamid Ould Ahmed
PARIS/ALGIERS (Reuters) - Fifty years after Algeria won independence, France's new president, Francois Hollande, finally appears ready to express regret over one of the bloodiest episodes in its colonial history.
The trauma of the 1954-1962 Algerian war, in which hundreds of thousands were killed or uprooted, left deep scars in both societies, stalling a potential economic and political partnership that could help revive the Mediterranean basin.
France's Socialist president has an affinity with Algeria, where he spent eight months working at the French embassy in 1970 and has regularly returned. With the 50th anniversary of Algerian independence on July 5, Hollande's election in May has rekindled hopes for an elusive reconciliation.
"Now that he has taken power, we are expecting action," said Algerian Minister for War Veterans Mohamed Cherif Abbes.
Before winning the presidency, 57-year-old Hollande suggested it was time to turn the page on France's 132-year Algerian colonial history, although he stopped short of promising the formal apology many in Algeria want to hear.
"Today, between an apology that was never made, and forgetting, which is to be condemned, there is scope for taking a frank and responsible view of our colonial past," Hollande wrote in a column for Algerian newspaper Al-Watan in March.
The war of independence cost the lives of 1.5 million Algerians, the Algerian government says, and it has pushed for Paris to admit its part in the massacre of 45,000 Algerians who took to the streets to demand independence as Europe celebrated victory over Nazi Germany in 1945.
French government officials declined to speak directly on the matter, highlighting the sensitivity of ties. But diplomats are working to crystallize Hollande's position ahead of an expected visit to Algeria this year that would be the first by a French president since Nicolas Sarkozy in 2007.
He has already promised to break with Sarkozy's immigration and security policies, seen by many as stigmatizing France's 5 million Muslims, who are mostly of Algerian origin.
"Now is the time. We must take initiatives and can't let this moment pass," said Jean-Pierre Chevenement, a former defence minister who heads the Franco-Algerian Association. "The government is ready, as is the president."
In the run-up to the anniversary, both sides agreed not to organize official events. Even an exhibition in Paris, the first in France showing the use of torture by its soldiers, caused consternation among diplomats worried about reopening old wounds.
"We don't share the same memories, but we can share our history. If we managed it with the Germans, then it's a piece of cake with the Algerians," said Pascal Blanchard, an expert on colonial history at the research centre CNRS in Marseille.
While there is a desire in Paris to turn the page, Hollande can only go so far before facing serious questions at home.
Just as the Algerian community feels stigmatized, many so-called "pieds noirs" ("black feet") - North African-born Europeans repatriated after independence - and Muslim "harkis" who fought in the French army against Algerian insurgents, oppose a formal apology.
Some say it is to them that the French government should apologize and provide compensation.
In one letter sent to this 2 million-strong community during the campaign, Hollande promised neither "amnesia nor repentance". He had also previously said that it was useful for France to offer an official apology to the Algerian people.
"Politicians ... write any old thing to keep us happy," said 82-year-old Gerard Perrin, a fifth-generation 'pied noir' who received two letters from Hollande earlier this year.
"Nobody has done anything for us. With President Abdelaziz Bouteflika in power, I don't think any compromise is possible."
In Algeria, the government rarely speaks officially on the issue, letting independence-era heroes act as its mouthpiece. Many of these veterans demand compensation from France, a law criminalizing colonialism and a formal apology from Paris - suggesting Hollande's expression of regret might not be enough.
The case is complex because, unlike elsewhere in its empire, Paris treated Algeria as an administrative unit of France itself and attempted to negate the territory's own history and culture, leaving a legacy of bitterness.
Former President Jacques Chirac, after a landmark visit in 2003, had his administration craft a Franco-Algerian friendship treaty in the same vein as one with Germany after World War Two. In his memoirs, he said his efforts failed because Algeria had insisted on a full apology.
"We have no hatred towards the French people, but we have the right to ask France to recognize the crimes of colonial France and then apologize," said Tayeb Al Houari, secretary-general of the National Organisation of Children of the Martyrs.
"There is an opportunity for the new French government to think about the right way to close the file of the colonial era and deal with Algeria as an independent state."
The Algerian government has never explicitly formulated a demand for an apology and there are differences of opinion within Algeria.
In 2010, for example a bill proposed by 125 lawmakers to criminalize French colonialism never made it through parliament.
"Does the Algerian government really want a formal apology? From what I have understood, Prime Minister Ahmed Ouyahia did not support it and that's why this bill failed," said Guy Perville, a historian on French-Algerian relations. "If they abandon this, then it opens the door to a compromise."
The National Liberation Front that has ruled Algeria for the past 50 years won a parliamentary election in May, going against the tide of the "Arab Spring" which has transformed the political landscape in many neighboring countries, although there is still wrangling about who will be the next prime minister.
Hollande has much to gain from improving ties with Algiers.
France is struggling to integrate its Muslim minority. Many second- and third-generation Muslims of North African origin feel alienated in their country of birth.
Bariza Khiari, the Algerian-born Socialist vice-president of France's upper house of parliament, says Hollande will try to tackle that by providing more visas to Algerians, facilitating socio-economic and cultural exchanges and easing naturalization.
"We have emerged from a long, difficult political period for immigrant and Muslim populations in France," she said. "These are small things that will make a big difference every day."
At a time when France is stifled by a lack of growth and the euro zone debt crisis, better ties could bring stronger trade links, not just with Algeria but in the wider Mediterranean.
Flush with oil and gas resources, Algeria is the largest Francophone country outside France itself, yet annual trade exchanges with the former Colonial power hover at a mere 10 billion euros ($12.7 billion).
"The future is positive but the path will be tortuous," Algeria's ex-prime minister Sid Ahmed Ghozali told a forum in Paris. "We should ... look at ties not from an intellectual and moral perspective, but through the interests of the people."
(Editing by Lin Noueihed, Daniel Flynn and Robin Pomeroy)