By Alistair Lyon, Special Correspondent BEIRUT, Jan 26 (Reuters) - Lebanon's crisis could spiral into more bloodshed unless the Western-backed government and Hezbollah-led opposition find a face-saving way out of a bitter power struggle that is complicated by U.S.-Iranian rivalry.

Sunni-Shi'ite clashes killed four people and wounded 200 in Beirut on Thursday, two days after three people were killed and 176 wounded in violence accompanying an opposition-enforced strike.

The street chaos reminded many Lebanese of the 1975-90 civil war and prompted separate calls for calm from Shi'ite Hezbollah leader Sayyed Hassan Nasrallah and his main foe Saad al-Hariri, whose Future Movement dominates the Sunni-led government.

"We have reached boiling point and the political leaders have realised this," said Oussama Safa, head of the Lebanese Centre for Policy Studies, arguing that a "clearly alarmed" Nasrallah was backing away from further escalation.

Hezbollah, the only Lebanese faction to keep its weapons since the civil war, can outmuscle the army or any of its political rivals. But it has sworn to use its guns only against Israel. Getting sucked into a sectarian struggle or a civil war would discredit it in Lebanon and the Arab and Islamic world.

"It's a quandary for the opposition," said Amal Saad Ghorayeb of the Middle East Centre of the Carnegie Endowment for International Peace. She said Hezbollah's inability to use its military might had spurred its foes play the sectarian card.

Nevertheless, Hezbollah would not accept defeat, she said.

Conflict in Lebanon has been brewing since Syria's troop pullout in April 2005 led to renewed U.S.-French pressure on Syrian- and Iranian-backed Hezbollah to disarm. Last year's July-August war embittered the rift.

Hezbollah accused the government of secretly wanting Israel to destroy its guerrillas, in line with U.S. wishes. The Islamist group's critics were furious that Nasrallah had dragged Lebanon into an unwanted war, perhaps at Syria or Iran's behest.

Hezbollah, along with its Shi'ite and Christian allies, has been demanding veto power in the cabinet, saying this would prevent either side from doing the bidding of their foreign backers. Last month it added a new demand for early elections.

Prime Minister Fouad Siniora, encouraged by Washington and Paris, has rejected these demands, even after all five Shi'ite ministers and one Christian quit his cabinet in November.

"MILITIA GOVERNMENT"

"This government is now viewed (by the opposition) not only as unconstitutional but as oppressive and criminal," Ghorayeb said. "They see it as a militia government.

"There's no way they could coexist at this stage in any formula that does not give the opposition veto power at least."

The tensions have clouded the government's success in winning pledges of $7.6 billion in aid from international donors who met in Paris on Thursday to prop up its debt-laden finances.

Some of the money is tied to progress on reforms. These cannot materialise without a functioning government and unless Lebanon's intricate system of sharing power among Christians, Sunnis and Shi'ites escapes its present paralysis.

"Leaders on both sides know the situation is grave and that they need to reach a compromise," said Hilal Khashan, a political scientist at the American University of Beirut.

"The regional powers know that. Saudi Arabia has been trying frantically with Iran to reach some sort of agreement on Lebanon. The trouble is the two sides are divided on matters of high principle. There is very little room for compromise."

Saudi Arabia, a Sunni Arab powerhouse which strongly backs Siniora, has held a series of contacts with Shi'ite Iran over Lebanon this month, but Saudi Foreign Minister Saud al-Faisal denied on Thursday that any negotiation was going on.

Analysts said the Lebanese would find no solution without outside help. Even if Iran and Saudi Arabia did a deal, other powers such as the United States or Syria might scupper it.

"The real issue is not between Saudi Arabia and Iran, but between Iran and the United States," Khashan said.

The United States, sending more troops to Iraq, beefing up its naval strength in the Gulf and seeking to rein in Iran's nuclear programme, is also taking a tough line on Lebanon.

In his State of the Union speech this week, U.S. President George W. Bush accused "Hezbollah terrorists" of trying to undermine Lebanon's "legitimately elected government".

On Lebanon's volatile streets, divisions among politicians now risk being fought out with sticks, stones and bullets.

"There is another agenda in the street, which is based on the memory of civil war experience," said Patrick Haenni, an International Crisis Group analyst. "Street memories are imposing their rules on political leaders."

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