(Updates number of arrests, adds details)

By Rodrigo Martinez

SANTIAGO, March 28 (Reuters) - Masked youths threw stones at police who responded by firing tear gas and water cannon in the Chilean capital on Friday at the start of annual protests against the government and the country's free-market system.

Dozens of youths, some in school uniforms, threw objects into the Santiago's main street, the Alameda. Some wearing hoods or bandannas over their faces scattered pink pamphlets that read "Popular Union of Students."

Police in armored vehicles sped through the street spraying clouds of tear gas as officers riot gear rounded up youths and bundled them into police buses as sirens blared. Barriers were erected cordoning off the presidential palace nearby. Police said they had detained 185 people.

The protests were aimed at Chile's capitalist-style economic model and the government, which the groups say manipulates the education system to favor the wealthy and exclude the poor.

President Michelle Bachelet condemned the violence.

"Democracy in Chile is solid and there is no justification for violence," she told reporters as riot police in flak jackets and helmets manned intersections and street corners.

Two small bomb blasts have rocked banks in the two weeks running up to Saturday's anniversary of "Day of the Young Combatant." The day marks the deaths of two brothers, Eduardo and Rafael Vergara, during Augusto Pinochet's 1973-90 dictatorship.

Bachelet was herself briefly detained and tortured along with her mother during Pinochet's harsh dictatorship, in which nearly 3,200 people were killed.

"If one wants to pay homage to the tremendous tragedy of the Vergara brothers, during a period when Chile was not democratic, the right thing to do is guarantee that democracy means being able to express yourself but without violence," Bachelet said.

Chile is one of the most stable countries in the region, but Bachelet's popularity has taken a bashing because of the way her government has handled past student protests as well as a botched transport system for the capital.

There have also been corruption allegations against members of her administration.

"We think this neo-liberal education system that the government has introduced should be stopped," said Saray Acevedo, of the National Popular Coordinator of Students. She handed out the flyers to passers-by that read "Against a neo-liberal education. Struggle by the people and students."

Some ordinary Chileans say the protesters have a point.

"The government speaks but does not act. I think the people should protest more, they are too passive," said Rodrigo Nunez, a 39-year-old engineer, as he walked past armored police trucks.

"There are so many problems. It is true education is expensive and marginalizes the poor. The cost of living is high. Electricity and gas prices are up. Look at how they protest in Argentina! I voted for this government and feel conned," he said.

Last year, students wearing balaclavas clashed with police in Santiago and other cities, throwing stones and gasoline bombs. Police retaliated with tear gas and water cannon.

At least officers were wounded in those clashes and police arrested more than 850 people across the country. Many businesses shut down. Several explosive devices detonated but no one was injured.

Chile has vowed to clamp down on groups who set off bombs and extra police will patrol the streets of Santiago on Saturday. (With reporting by Simon Gardner and Reuters TV; Editing by Chris Wilson)

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