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By David Clarke

DJIBOUTI, Jan 29 (Reuters) - Somali presidential candidates told lawmakers meeting in Djibouti on Thursday how they plan to bring stability to a nation riven by feuding militias, rival Islamist insurgents and killing.

Somalia's new parliament, including 200 moderate Islamist opponents, is to elect a president on Friday in the hope a more inclusive administration with strong leadership can face the daunting challenges at home.

The world push for reconciliation comes at a critical time for Somalia because the departure of Ethiopian troops, who had been supporting the government, has exacerbated a violent power struggle between rival Islamist factions.

Washington fears Somalia may become a breeding ground for terrorists and destabilise the fragile Horn of Africa.

A moderate Sunni group captured a central trading town on Thursday from the hardline al Shabaab group that seized the seat of parliament in Baidoa this week and has vowed to impose its strict version of Islamic law throughout Somalia.

Fighters from government-allied Ahla Sunna Waljamaca ousted their rivals from Dusamareb after several hours of gunfire and mortar exchanges, witnesses said. One resident said 34 people had been killed in the fighting.

International players hope the election of a new president, taking place in neighbouring Djibouti due to insecurity at home, could lead later to hardline opponents joining the government.

Each of the candidates took to the stage and addressed lawmakers for 15 minutes. The field soon dropped to 14 as one pulled out saying there were enough people running already.

The two viewed as best placed are Prime Minister Nur Hassan Hussein and Sheikh Sharif Ahmed, the moderate Islamist leader of the opposition Alliance for the Re-Liberation of Somalia (ARS).

SHARIA LAW

Hussein is a quietly-spoken leader who won international kudos for standing his ground against former President Abdullahi Yusuf. He was viewed as an obstacle to peace and quit in December after threats of international sanctions.

Hussein's pledge to pursue the difficult task of political reconciliation if he becomes president and bring in those snubbing the peace process was applauded by the lawmakers.

Ahmed was chairman of the Islamic Courts Union that ruled Mogadishu in 2006 before America's main regional ally, Ethiopia, ousted them to prevent an Islamist state taking root next door.

Before joining the government, Ahmed split with the hardline Islamist opposition. He has pledged to forge peace with Ethiopia and reach out to his former allies to try and end the violence.

The loudest cheers came from Ahmed's supporters. He said Islam should be the foundation for the country and people should not be killing in the name of religion.

"We can deal with that and I think we can move forward if we have clear hearts and do the right thing," he said. "I have seen a glimmer of hope and there is an opportunity to do something."

But with al Shabaab in Baidoa, the government's physical control is restricted to just some areas of Mogadishu, where they are being helped by a 3,500-strong African Union force.

The capture of Dusamareb was a blow to al Shabaab, which wants to take over south and central Somalia. It still controls large swathes of the south and has generally brought security.

But its militant implementation of sharia law is unpopular among many of Somalia's traditionally moderate Muslims.

Terrified residents of Dusamareb fled to nearby woods during the fighting. Resident Osman Aden told Reuters he had counted 34 bodies among the trees, nearly all Islamist fighters.

"Al Shabaab has taken more than 20 people out of their homes. We cannot tolerate their slaughters. We want to reopen our Koranic schools and save our people and graves from the omnivorous al Shabaab," Ahla Sunna spokesman Sheikh Abdullahi Sheikh Abu Yusuf told Reuters.

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