* Opposition may have lost best chance at winning reforms
* Sunni leaders say opposition was waiting for Iran guidance
* Emergency law to be lifted on June 1
By Andrew Hammond
MANAMA, May 31 As martial law comes to an end in the Gulf Arab state of Bahrain this week, opposition activists are wondering whether they threw away what might have been the first real chance for democracy in the Gulf Arab region.
Shortly after young Bahrainis, inspired by uprisings in Egypt and Tunisia, converged on a roundabout in early February, the government offered dialogue with opposition parties on political reforms. But the talks failed to get off the ground.
After weeks of behind-the-scenes discussions during which sectarian tension worsened between the Shi'ite majority and Sunnis who saw the ruling Al-Khalifa family as protection, Saudi troops poured in on March 15, martial law was declared the next day and the roundabout encampment was broken up on March 16.
Critics say the leading opposition party Wefaq, headed by Sheikh Ali Salman, failed to show leadership during the unrest, allowing hardliners within the ruling family and among the Shi'ite opposition to steer events.
"What a massively missed opportunity. Wefaq should have had the conviction to stand ahead of the others and sit at the table. I'm sure they rue it," one Western diplomat said.
When talks eventually resume, he said, "the ceiling will be lower" and reforms could have been set back by a decade.
King Hamad bin Isa al-Khalifa authorised talks on democracy in 2001, but the opposition boycotted elections in 2002 because the upper house of parliament -- royal appointees -- was to retain key powers.
Seven opposition parties including Wefaq took part in 2006 elections, but hardliners broke away to form the Haq movement.
Haq's exiled leader returned during the protests on Feb. 26 and announced with other groups on March 8 that he wanted to turn the small island kingdom into a republic. That was anathema to Saudi Arabia which financially backs Bahrain to help stave off Iranian influence.
On Tuesday King Hamad called for reform talks "without preconditions" from July 1. But the parameters were vague, and with opposition leaders in jail, protesters off the streets and Wefaq attacked daily in state media, the government will have the upper hand to steer them away from parliamentary reforms.
FEAR OF LOSING THE STREET
Munira Fakhro of secular opposition group Waad says Wefaq was paralysed by fear of losing the street -- Shi'ite protesters radicalised by the deaths of their comrades when security forces made a botched attempt to clear the roundabout on Feb. 17.
"My analysis is that after all this anger and death among Shi'ites the street was tilted towards Mushaimaa. Ali Salman was afraid that if he accepted the crown prince's proposal without assurances he would be cheated at the end of the day," she said, referring to opposition anger over the upper assembly in 2002. "I told them, 'the crown prince wants to reach out to you but he's alone because no one is supporting him from his family, you must support him'."
Mushaimaa and the republic supporters are now among 21 men on military trial. The defendants also include Waad's Sunni leader Ibrahim Sharif and some independent Shi'ite rights activists prominent during the protests.
Salman, a young cleric born in 1965, says he didn't agree with the escalation in protests or the open call for a republic, but acknowledges that they complicated the position of Wefaq and the rest of the opposition.
"There is a view that we were late to respond to the call for dialogue, but we had our reasons," he said at Wefaq offices overlooking the waters of the Gulf.
"We did not go to public talks, but we talked behind closed doors. I met the crown prince three times alone during the crisis and my working team was meeting his working team almost daily. But there were no results until March 13."
That day the crown prince said again he was interested in dialogue, but specified this time that it would centre on seven principles, including representative government and a parliament with full powers.
On March 14, Wefaq and six other opposition groups said they wanted clarifications before entering direct talks with the crown prince.
The government and Sunni leaders have another theory for why the opposition appeared to drag their feet over negotiations: Wefaq was waiting for approval from Iran.
"We think so. How else would you explain them not coming to the negotiating table?" said Sheikh Abdul-Aziz bin Mubarak Al Khalifa, Senior International Counselor at the Information Affairs Authority.
"We need a rational, practical leader who doesn't look for religious blessings before he can embark on a political reform initiative," he said. "We didn't see leadership emerging from their side and they didn't let themselves loose from radical elements or come to the negotiating table."
Sheikh Abdullatif Al-Mahmoud, leader of the mainly Sunni National Unity Rally which emerged as a counter-weight to the Shi'ite opposition during the unrest, goes further.
"In the second week of March their clerics were telling the Shi'ite masses that the Hidden Imam was about to come. That held them up going into talks since they thought the Shi'ite state was coming," he said.
The twelfth Imam of mainstream Shi'ism disappeared in 9th-century Iraq and many believe he will return one day. Mahmoud also suggested the U.S. navy was coordinating with Wefaq and Iran could have been planning a military intervention.
Wefaq leaders roll their eyes at these accusations.
They say they are not interested in Iran's system of clerical rule, and that in any case most Bahraini Shi'ites look to Grand Ayatollah Ali Sistani in Iraq as their reference in religious affairs. Bahrain's most senior Shi'ite cleric is Sheikh Issa Qassim.
Mahmoud, Salman and other government and opposition figures spent all of March 13 at Wefaq offices in what proved to be fruitless last-minute talks before a decisive Saudi intervention.
Wefaq wanted a guarantee from the crown prince on elections to a constituent assembly to write a new constitution before entering face-to-face public talks.
Mahmoud wanted the royal family to have guaranteed representation on the assembly and a high bar on the percentage required to approve constitutional amendments to avoid Sunnis being permanently hostage to Shi'ite numerical superiority.
In a sign of the mistrust now prevailing, Mahmoud says that when news came in that Saudi troops were really coming, Salman stood up and announced: "We will seek the help of Iran."
Wefaq says he never said that. (Editing by Reed Stevenson and Jon Hemming)