By Carmel Crimmins and Manny Mogato

MANILA, Jan 25 (Reuters) - The Philippine government's casual approach to a peace deal with Muslim separatists is playing into the hands of foreign extremists who could exploit the frustration to trigger violence locally and overseas, political analysts say.

Talks between Manila and the Moro Islamic Liberation Front (MILF) about creating a homeland for around 3 million Muslims in the resource-rich south are stalled yet again, riling commanders and a younger generation, who were led to believe a breakthrough was on the cards this year.

The discontent is an opportunity for a handful of jihadists, hiding in remote areas in the restive south, to train fresh recruits for bombing campaigns, the analysts said.

"The way in which the peace process is being allowed to lapse by default is creating the space for violent jihadism," said Kit Collier, a counter-terrorism expert at Australia's National University.

Despite U.S. and Philippine efforts to flush out Islamic militants, a few members of Jemaah Islamiah (JI), a Southeast Asian Islamist network, have evaded capture.

Two Indonesians, Dulmatin and Umar Patek, both wanted for the 2002 Bali bombing that killed 202 people, are among those JI members suspected of roaming the islands off the southernmost tip of the Philippines.

"What are they (Dulmatin, Patek) doing down there? I think they are recruiting people, quietly in small numbers. Their ranks are steadily increasing," Collier said.

HAWKS IN CABINET

Muslims in the southern Philippines have been seeking some measure of self-rule from the largely Catholic central government for decades. But hopes of a real breakthrough, raised late last year, were smashed after the government altered previous consensus points and insisted any agreement be put to Congress.

The MILF fears Congress would reduce its envisioned homeland, repeating the experiences of the Moro National Liberation Front (MNLF), an older group from which the MILF splintered.

Manila intends to put forth another plan to kick-start a new round of negotiations, but after more than a decade of talking, no one is holding out much hope of a successful conclusion.

Although President Gloria Macapagal Arroyo has repeatedly said she wants peace, hawks in her cabinet are opposed to giving large swathes of land to Muslims and politically powerful Christian clans in the south would certainly oppose a deal.

The decades-old conflict has already killed more than 120,000 people, displaced 2 million and kept millions more in dire poverty despite their region having billions of dollars worth of unexplored mineral wealth and fertile farmlands.

MILF leaders talked recently to local commanders in central Mindanao, where foreign jihadists trained during the late 1990s.

"Some of our commanders were starting to lose faith," a rebel leader, who declined to be named, told Reuters.

FOREIGN MINERS

More radical MILF members, some with experience from Afghanistan, could tie up with members of Abu Sayyaf, a small band of Philippine militants notorious for kidnappings, decapitations and a bomb attack on a ferry near Manila that killed 100 people in 2004, analysts said.

They could also start a bombing campaign in the south, where foreign miners such as Xstrata are starting to explore, to put pressure on the government.

While Indonesia has arrested hundreds of militants allegedly linked to JI, foreign jihadists continue to operate in the Philippines, training recruits in bomb-making.

Malaysian Zulkifli bin Hir, alias Marwan, was believed to be behind a series of bombings in Mindanao in 2006 along with a local rebel, Abdul Basit Usman, security officials said.

When the peace process was going well, the MILF helped Philippine and U.S. forces track JI and Abu Sayyaf fighters. But with talks again stalled, some could take a more radical path.

"There is still going to be radical Muslim youth from Abu Sayyaf and MILF and JI still rumbling around that could morph into something more radical yet and more dangerous," said Tom Green, executive director of Pacific Strategies and Assessments, a Manila-based risk consultancy. (Reporting by Carmel Crimmins and Manny Mogato; Editing by Raju Gopalakrishnan and Bill Tarrant)

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