(Adds talks, French embassy statement)

By Saliou Samb

CONAKRY, May 30 (Reuters) - Guinea began paying salary arrears to junior soldiers on Friday in an attempt to end a five-day bloody mutiny that had worsened instability in the world's top bauxite exporter.

Calm returned to the capital Conakry but banks, schools and many large businesses were shut as people stayed at home after clashes since Monday between the mutineers and troops loyal to President Lansana Conte, who has ruled Guinea since 1984.

Several people, mostly civilians, were killed and dozens were wounded during fighting in Conakry and other towns after the junior soldiers revolted over pay at the largest army base in the former French colony.

The thud of heavy weapons and crackle of automatic gunfire stopped overnight.

The mutineers appeared to have returned to barracks to receive the first instalment of five million Guinean francs ($222) in salary arrears granted by new Prime Minister Ahmed Tidiane Souare earlier this week.

"We are queuing to receive 1 million Guinean francs each, representing our arrears," one soldier told Reuters by phone, declining to be identified. "Everyone here has decided and they say the (mutiny) is over."

An army general and presidential guard officers met the mutineers at the Alpha Yaya Diallo base on Friday. Sources close to the talks said good progress was made and that the mutineers had released two senior military officers seized this week.

MUTINEERS' DEMANDS

The mutineers have demanded the dismissal of the heads of the army, navy and air force, accusing them of corruption and stealing their salaries and food supplies.

Military insiders say the government is unlikely to agree to dismiss top officers, many of whom are staunch Conte supporters.

As night fell on Friday, pick-up trucks packed with heavily armed presidential guards returned to the November 8 bridge guarding the entrance to central Conakry, where the presidential palace and government offices are situated.

The mutiny occurred after Conte dismissed consensus Prime Minister Lansana Kouyate last week, 15 months after he was named to defuse a bloody general strike in which more than 130 people were killed.

"France is following the situation in Guinea with concern ... (and) only transparent and democratic legislative elections will provide a durable solution to the crisis," said a statement from the French embassy on Friday.

Analysts say Souare's prompt capitulation to mutineers' demands risks encouraging further unrest, against the backdrop of new strike threats by union leaders.

People returned to Conakry's central market and a thin trickle of taxis and minibuses were back on the coastal city's potholed roads.

Food prices were little changed in the market but fuel prices quintupled to more than 30,000 Guinean francs ($6.80) per litre after several service stations closed because of looting by mutineers.

The Friguia factory of Russian aluminium producer Rusal, the only plant in Guinea that refines crude bauxite ore, was operating normally, a company spokeswoman said in Moscow.

The plant has a capacity of 527,000 tonnes of alumina a year that it plans to increase eventually to 1.5 million. (For full Reuters Africa coverage and to have your say on the top issues, visit: http://africa.reuters.com/) (Writing by Daniel Flynn; editing by Alistair Thomson and Ralph Gowling)

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