By Alistair Lyon, Special Correspondent

BEIRUT, Dec 28 (Reuters) - Troops and razor wire ring the Grand Serail, seat of Lebanon's government, to keep out Hezbollah-led protesters in a standoff that encapsulates wider struggles set to roil the Middle East in 2007.

"Lebanon is the epicentre, at least in symbolic terms," said Beirut analyst Rami Khouri. "Local actors with foreign and regional support are playing out their contest on the streets."

So far the month-old confrontation is peaceful, though many Lebanese fear it may not stay so as politics descends into mass protests in a country evenly split between those well-disposed to the West and those with a militant Islamist, pan-Arab vision.

The rivalry between Shi'ite Hezbollah, backed by Syria and Iran, and its Sunni Muslim, Christian and Druze foes is partly sectarian and thus tangles with regional Sunni-Shi'ite tensions.

Lebanon's troubles are tied in turn to conflicts pitting Syria, Iran and Islamist groups against Israel and the United States, with Sunni Arab states caught awkwardly in the middle.

As sectarian violence mushrooms in Iraq, few expect the coming year to end bloodshed there, halt Iran's growing regional ascendancy or calm the Middle East's other flashpoints. There is no guarantee that Washington will be ready or able to revive Middle East peace talks amid Israeli reluctance to return occupied land, Palestinian infighting and the refusal of the Hamas-led Islamist government to recognise the Jewish state. The United States, viewed by Arabs as too biased towards Israel to act as a trusted broker, will remain the leading power in the region, but with declining influence, analysts say.

AMERICAN PRIMACY ERODING

Richard Haass, chairman of Washington's Council on Foreign Relations, argues that a period of U.S. regional dominance, book-ended by the 1991 Gulf War and the 2003 Iraq invasion, is already over, barely 15 years after the Soviet Union's demise.

"The Middle East's next era promises to be one in which outside actors have a relatively modest impact and local forces enjoy the upper hand -- and in which the local actors gaining power are radicals committed to changing the status quo," he wrote in the latest issue of Foreign Affairs.

In Iraq and the Palestinian territories, Islamists have already displaced secular elites, militias eclipse government authority and leaders linked to the West are on the defensive.

More than ever, Middle Eastern conflicts are interlocked, not least by the struggle of Iran, Syria and others to counter perceived U.S. and Israeli efforts to dictate the region's fate.

Saudi Arabia, Egypt and Jordan, whose Western-supported leaders rule populations largely hostile to U.S. policies, have shown alarm at Iran's growing clout and nuclear ambitions.

British analyst Toby Dodge said it would be an "absolute disaster" if a disintegrating Iraq became the arena for a proxy contest between Shi'ite Iran and Sunni-led governments, but said there remained a chance this could be averted.

"The other model would be bringing all Iraq's neighbours into a regional and international compact that gives them a framework within which to cooperate, not compete," he said.

Engaging Iran and Syria to help pacify Iraq is among the proposals of a bipartisan panel led by former U.S. Secretary of State James Baker and former congressman Lee Hamilton.

But U.S. President George W. Bush has all but dismissed the idea as he weighs a possible policy shift, and some analysts query whether Iran and Syria have the means to stabilise Iraq, even if Washington were ready to pay their price for trying.

Doubts also hang over whether any "surge" in U.S. troop numbers could stem Iraq's Sunni revolt or sectarian bloodbaths.

"More force won't solve the problem," said Mustafa Alani of the Dubai-based Gulf Research Center. "Prime Minister Nuri al-Maliki's government may not survive long. There will be more ethnic cleansing and sliding into an undeclared civil war."

Dodge said the main Shi'ite groups could not fully control their fighters. "The militias themselves are fracturing. Both the Badr Brigade and the Mehdi Army are looking increasingly like shifting coalitions, not coherent military forces."

Saudi Arabia, dismayed at the chaos in neighbouring Iraq, is also worried by Syria's alignment with Iran, Alani said.

He forecast heavy Saudi-led pressure on Syria next year if the U.N. inquiry into the killing of Lebanese ex-premier Rafik al-Hariri pins the blame on Damascus -- which denies any role.

Lebanon's government, defying the siege by its opponents camped out in downtown Beirut, suspects Hezbollah's campaign for a decisive cabinet share is a Syrian-inspired bid to block creation of an international court to try Hariri's killers.

Hezbollah in turn accuses its Sunni-led foes of betraying it in the war with Israel and of seeking to disarm its guerrillas.

"It is one street against the other, one Lebanon against another," said Crisis Group Middle East director Robert Malley.

"Neither side can afford to lose, and neither can govern alone," he said, in a remark just as relevant to Sunnis and Shi'ites in Iraq and to Palestinian rivals Hamas and Fatah.

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