* Not guilty plea "a first step," says al-Marri attorney

* Trial expected to be in Illinois

* Confinement conditions recently improved dramatically

By Jane Sutton

MIAMI, March 9 (Reuters) - An alleged al Qaeda sleeper agent will make his first court appearance on Tuesday after being held more than five and a half years without charge and in extreme isolation in a U.S. military prison.

Ali al-Marri was the last person held in the United States as an "enemy combatant" under Bush administration policy that allowed those the president considered to be terrorists to be held indefinitely without charge.

Following a review ordered by President Barack Obama, the 43-year-old citizen of Qatar was indicted in Illinois last month on charges of conspiring with al Qaeda and providing material support for terrorism.

Marri is scheduled to appear before a U.S. judge in Charleston, South Carolina, on Tuesday for a formal presentation of the charges and will plead not guilty, said one of his attorneys, Andrew Savage.

"It's just the initial step; it's a first step. It's a momentous moment just because he's back in court and that's always good," Savage said.

"Starting tomorrow he will employ the most fundamental rights granted to all citizens and lawful residents of the United States in his review of the charges contained in the indictment and the government's evidence against him."

The indictment contains no details about the charges. U.S. authorities have said previously that Marri is suspected of being an al Qaeda "sleeper" agent sent by Osama bin Laden and by Khalid Sheik Mohammed, the mastermind of the Sept. 11, 2001 attacks, to disrupt the U.S. financial system by hacking into bank computers.

Marri entered the United States legally on Sept. 10, 2001, and was arrested in December 2001 in an investigation of the Sept. 11 attacks. He was charged in Illinois, where he had attended school, with credit card fraud and making false statements to the FBI, and pleaded not guilty.

The charges were dropped in 2003, when President George W. Bush declared him an "enemy combatant" and sent him to the Consolidated Naval Brig in Charleston, South Carolina, where he remains.

Marri will be transferred to civilian custody shortly before his court appearance, but will likely return to the brig afterward under the U.S. marshals' supervision, pending a further hearing on his request for bond, Savage said.

Marri is unlikely to be released on bond because of the nature of the charges against him, and will not contest efforts to send him to Illinois for trial, Savage said.

"He believes that this will result in his repatriation to his homeland and return to his family, a goal that he has pursued for more than seven years," the lawyer said.

Conditions of Marri's confinement at the brig have improved dramatically in the last year or two, the lawyer said.

At the direction of the Defense Intelligence Agency, Marri had been held in a cold concrete cell with no light, clocks, mattress or reading material, and with only cold food and limited human contact, his lawyers said.

He now is allowed out of his cell for much of the day, and has access to television, a library, a computer and is allowed to converse with the brig staff and receive frequent phone calls from his attorney, said Savage.

Marri's lawyers sued to improve his conditions in 2005, but credit the brig staff with bringing about the changes.

"It wasn't the military members and the staff at the brig who abused him, it was at the direction of and by the DIA," Savage said.

He said the men and women who worked at the brig were "very uncomfortable" with Marri's treatment and that his current humane treatment was "solely as a result as deep, unending requests for improvement of his conditions." (Editing by Eric Walsh)

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