* Nepal PM to allay Indian fears over China

* A 1950 bilateral treaty in focus

* Flooding of common rivers an issue

By Gopal Sharma

KATHMANDU, Sept 13 (Reuters) - Nepal's new Maoist prime minister, Prachanda, arrives in New Delhi on Sunday seeking to allay fears that Kathmandu would now move closer to China, dumping its traditional friendship with India.

Such doubts gained ground in New Delhi after Prachanda travelled to China last month for the Olympics closing ceremony, departing from a tradition which has seen incoming Nepali leaders make New Delhi their first foreign port of call.

There is little doubt that ignoring India is almost impossible for Kathmandu: India is landlocked Nepal's major economic as well as trade partner, and supplies the bulk of essential goods. It is also Nepal's sole supplier of fuel.

"Whatever ties it seeks with China, India is their lifeline and they would want it to remain that way," Indian analyst Bharat Karnad told Reuters in New Delhi.

"He definitely wants a normal friendly relationship with India."

Experts say New Delhi would be keen to find out from Prachanda how he planned to take bilateral relations forward after the Maoists made anti-India rhetoric an integral part of their decade-long insurgency that ended in 2006.

The huge trade imbalance in favour of India riles Nepal, and the Maoists also seek the scrapping of a 1950 bilateral treaty defining travel, business, social and economic ties, saying it shortchanged the Himalayan nation.

"Whether the treaty is to be modified, revised or reviewed and what provisions need to be changed is not clear yet," a senior government official, who asked not to be named, told Reuters.

Bilateral trade now exceeds $2.3 billion and is still growing. But Kathmandu is unhappy that the trade deficit rose to $1.1 billion in the financial year up to mid-July 2007 from $977 million in the same period the previous year.

"Having such a huge deficit with one country is a very difficult situation for our economy," said Krishna Raj Bajgain, a senior official of the state-run Trade and Export Promotion Centre. "We can't afford it and must try and bridge."

At home, Prachanda is also under pressure to press India for $37 million in compensation after a river in southeast Nepal burst a dam built and maintained by India and washed away several Nepali villages, displacing more than 70,000 people.

India says Nepali authorities did not help with the repairs.

During his four-day visit, the rebel chief-turned-premier is to meet Indian counterpart Manmohan Singh and other leaders. Their discussions are likely to include the flooding of common rivers.

Prachanda is also due to attend a meeting with Indian businesses and travel to the nation's IT capital, Bangalore.

"The visit is expected to further enhance the trust, goodwill and mutually beneficial cooperation between Nepal and India," said Gyan Chandra Acharya, Nepal's most senior diplomat. (Additional reporting by Bappa Majumdar; editing by Krittivas Mukherjee and Roger Crabb)

AlertNet news is provided by