By Alistair Scrutton

NEW DELHI, Sept 26 (Reuters) - Reliance, India's biggest private company, is laying off 1,000 staff in India's most populous state after failed attempts to reopen Western-style supermarkets, which closed after protests from small traders.

The move by Uttar Pradesh state to shut 10 Reliance Fresh supermarkets in August highlighted how efforts to modernise India's economy face political obstacles amid fears that millions of small shopkeepers and traders could lose their jobs.

The protests reflect wider social tensions in India, where private investment to fuel the booming economy frequently leads to protests from traders scared of new retail competition and villagers worried about the loss of their land to multinational factories.

"We have issued termination notices for around 1,000 staff," a senior company official, who asked to remain anonymous, told Reuters on Wednesday. "It's a critical situation."

"We do not have plans to leave Uttar Pradesh, but for the moment everything is on hold," the official added.

Reliance Retail, a subsidiary of Reliance Industries, had planned to invest more than $5.5 billion in its venture, which will include hypermarkets, supermarkets, discount and department stores.

But the company has become a lightening rod for protests against modernising retail in some Indian states, while being welcomed elsewhere.

In Uttar Pradesh, the company has so far failed to persuade the state government to reopen the stores, originally closed because of law and order problems after protests from traders.

Home to about 170 million people, the state is one of the most crowded regions on earth. It is roughly the size of the United Kingdom yet only five nations, including India itself, have a higher population.

In another blow for Reliance, around 15 stores in Noida and Ghaziabad, two booming middle-class towns on the outskirts of New Delhi, were shut over the last week on police orders, although staff have not yet been sacked there, the Reliance official said.

This week, traders in eastern Orissa state ransacked two stores, forcing police to order their closure, one of several incidents in the last month across India, media reports said.

Reliance's plans to open supermarkets in north and east India have been delayed.

Large companies account for only 3 percent of the India's $350 billion retail market, which analysts estimate could double by 2015.

Wal-Mart Stores Inc., the world's biggest retailer, also faced protests when officials came to India for a deal with Bharti Enterprises.

Shares of Reliance Industries closed 1.82 percent up at a record high for the fifth day in a row at 2,339.6 rupees on Tuesday in a Mumbai market which ended up 0.32 percent.

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