KUALA LUMPUR, Sept 9 (Reuters) - Malaysian police fired live rounds to quell a riot in Malaysia's Muslim heartland, wounding two men, after trying to break up an opposition rally with water cannon and tear gas, local media said on Sunday.

Local police declined to comment to Reuters on the riot, which broke out late on Saturday night in the northeastern state of Terengganu after a group of opposition parties, including the main Islamist party, held an illegal rally, the reports said.

State news agency Bernama quoted Terengganu's police chief, Ayub Yaakob, as saying that a policemen had fired two shots from a pistol, injuring one man in the shoulder and another in the neck, after he was set upon during the riot.

An eyewitness told Reuters by phone the crowd of about 500 had attacked police with stones after they set up road blocks around the rally and then moved in to break it up. The two groups fought each other until the early hours of Sunday.

In Malaysia, opposition parties must get police approval to stage rallies.

"It was police who attacked the civilians," said Kamarudin Jaffar, a leader of Islamist party Parti Islam SeMalaysia (PAS), saying the rally had been staged by PAS, other parties and non-government bodies to call for free and fair elections.

"It was a peaceful rally... Police set up all the road blocks around the area with water cannons. Then suddenly in the middle of the night they started using water cannons on people."

Malaysia's prime minister is widely expected to call for an early general election late this year or early next year.

State news agency Bernama said on Sunday that 23 people had been detained and that seven, including four policemen, were injured. Bernama said the protesters had also hurled pieces of metal and wood and a molotov cocktail at police.

The riot is another sign of rising social tensions in Malaysia as the nation moves into election mode.

The country is governed by a multi-racial coalition which is dominated by Muslim ethnic Malays and includes parties aligned with large minorities of ethnic Chinese and ethnic Indians.

Many Malay Muslims feel the coalition gives too much ground to the other races, while many ethnic Chinese and Indians feel the government discriminates against them through a decades-old affirmative-action agenda aimed at helping Malays.

Opposition parties are split along racial lines but are united in complaining that the electoral system is rigged against them and that the mainstream media pay them little attention.

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