(Edits, adds background)

By Emma Thomasson

AMSTERDAM, July 2 (Reuters) - International Criminal Court judges ordered the release of their first suspect, a Congolese militia leader, on Wednesday because prosecutors are withholding evidence but said he should remain in custody pending an appeal.

Judges halted proceedings against Thomas Lubanga last month due to concerns he could be denied a fair trial as his defence cannot view some prosecution evidence. Accused of enlisting child soldiers, he has been in custody in The Hague since 2006.

"In the absence of the prospect of a trial, the accused cannot be held in custody," judges said in their ruling. "The only correct course is to order the release of the accused because ... a fair trial of the accused is impossible."

But the judges added Lubanga should not leave detention until the court has dealt with a prosecution appeal.

The judges said they had given full consideration to the fears of Lubanga's alleged victims in deciding to release him. Victims have warned that freeing the former warlord could ignite a "fire ball" in Congo's volatile Ituri region.

Lubanga is accused of recruiting child soldiers in Ituri, long riven by conflict over its rich natural resources including gold, diamonds and oil and where conflict has raged well after a peace accord officially ended Congo's 1998-2003 war.

Experts estimate that a decade of violence in Congo has killed 5.4 million people, mainly through hunger and disease.

Lubanga's trial had been due to start last week. The halt to proceedings is a major setback for the court set up in 2002, which now has 106 member states and is also investigating crimes in Sudan, Uganda and the Central African Republic.

HIGHEST STANDARDS

The prosecution has withheld from the defence documents provided by the United Nations and others that could help Lubanga's case because they were given on the condition of confidentiality to protect sources in conflict zones.

The prosecution has said the trial should be allowed to continue because the United Nations had now agreed to let the judges view most of the material, but presiding Judge Adrian Fulford has rejected strict U.N. conditions.

Chief Prosecutor Luis Moreno-Ocampo, who has said he hopes the dispute over evidence can be resolved so the trial can get under way in September, requested a suspension of any release.

"The need to do justice for the victims in Congo and to respect a fair trial for Thomas Lubanga can and must be harmonised," he said. "The ICC is a permanent and global institution. It must be based on the highest standards of law."

Lorraine Smith from the International Bar Association said the court was in a tough position. "This is the purpose of independent judges. They have taken a difficult decision but one that will ensure trials are fair," she said.

The judges also granted the prosecution leave to appeal against the halt to proceedings and rejected a defence call to nullify Lubanga's arrest warrant, saying there were still reasonable grounds to believe that he is criminally responsible.

"It is to be emphasised therefore that the stay imposed on the proceedings does not undermine the validity of the warrant since it is no more than the direct result of the present impossibility of trying the accused fairly," they said.

The judges' decision will overshadow a celebration planned in The Hague on Thursday to mark the 10th anniversary of the court's founding treaty, the Rome Statute. (Additional reporting by Ingrid Melander in Dakar and Pellet Kipela in Kinshasa, editing by Sami Aboudi)

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