TENGGULUN, Indonesia (Reuters) - Fifteen years since they were members of a radical Islamist group that killed 202 people on Indonesia's tourist island of Bali, Ali Fauzi and Sumarno are building peace instead of bombs.

The former devotees of the Jemaah Islamiah militant group are counseling ex-militants, educating their children, and employing their wives as teachers - part of Fauzi's Peace Circle initiative launched this year to combat extremism.

At the Lingkar Perdamaian school in Tenggulun village in East Java on Thursday, they celebrated Indonesia's Independence Day with a flag raising ceremony. Among those attending were 50 ex-combatants and militants.

In front of the local police commander and military chief, with students and former combatants arranged in formation looking on, the Indonesian flag was raised by three ex-militants in crisp white uniforms as the national anthem played.

"This came from the deepest part of our heart. It showed that we want to become good citizens,” he said.

Fauzi admitted some of the former radicals refused to stand and salute the flag, a hated symbol for militants who want Indonesia to abandon its secular constitution and become an Islamic caliphate.

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"It's a process. Radicalization needs a process and so does deradicalization," he told Reuters.

"I understand some of them did not want to be exposed, still shy, still worried about their old community," he said.

"They were not ready to go to public.”

Indonesia, the world's largest Muslim-majority country, has grappled with a small but virulent minority of Islamist militants since it emerged from authoritarian rule in 1998. The government promotes deradicalization - its self-styled "soft approach" to the problem - as a crucial weapon.

As the ceremony was underway in Tenggulun, a similar event was being held in a nearby prison, where the militant Umar Patek, sentenced for his role in the Bali bombings, carried the flag.

'MESSED UP'

Fauzi is the brother of the executed ringleaders of the 2002 Bali attacks Amrozi and Mukhlas. Another brother, Ali Imron, is serving a life sentence for the same attack on a club packed with tourists just over a year after the Sept. 11, 2001, attacks in the United States.

Trained by Hambali, the Indonesian al Qaeda leader imprisoned in Guantanamo Bay, he taught Amrozi and Sumarno, along with about 80 others in East Java, to build bombs.

Sumarno drove a minivan packed with explosives from East Java to Bali. The vehicle was later parked outside the Sari Club and detonated with devastating results.

Sumarno - who says he believed the bomb ingredients were going to a conflict between Christians and Muslims on a remote island in Indonesia's far east - was imprisoned for his role.

“I was really messed up,” he said. “Bali was a peaceful place, not a combat zone.”

Fauzi was later imprisoned in the Philippines for terrorism offences unrelated to the Bali attack.

Fauzi said his deradicalization began in detention on his return to Indonesia in 2007, influenced in part by a police officer who paid for some medical treatment.

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He also credits meetings with victims of attacks for persuading him to choose a different path.

"One of them was Max Boon, a Dutch man, whose legs were amputated (after a bomb attack on a hotel in the capital, Jakarta),” he said.

"He was a Catholic, but he forgave me and my students. And then I thought: what if I was in his position, could I be like him?”

The “alternative community” at Lingkar Perdamaian, in the same village where Fauzi and his brothers were raised, will prevent the recidivism of former convicts and their children following the same route, he said.

"For years, we have experienced terrorism in Indonesia,” he said. “But we also have years of experience in healing the terrorism disease.”

(Editing by Robert Birsel)