(Adds details of communist rebel raid)

By Manny Mogato

MANILA, May 19 (Reuters) - The Philippines favours more direct contact with the country's largest Muslim rebel group to help end nearly 40 years of conflict in the south, a senior official said.

Retired general Rodolfo Garcia, the government's chief negotiator with the Moro Islamic Liberation Front (MILF), said peace panels from both sides should be allowed to interact more closely.

Currently the talks are brokered by Malaysia and all proposals and responses have to go through Malaysian interlocutors.

"We could probably accomplish more under a relaxed atmosphere," Garcia told foreign correspondents in Manila.

"Everything passes through Malaysia under our rules, but if Kuala Lumpur could allow our two sides to have some direct links, we could be more productive and bridge our gaps easier."

The Philippines, a largely Catholic country, has been battling Muslim and communist insurgencies that have killed around 160,000 people since the late 1960s and stunted investment in the resource-rich archipelago.

Manila has been in stop-start negotiations with the MILF for more than a decade. It broke off talks with the communist New People's Army (NPA) in 2004, but last week held a secret meeting with rebel leaders in Norway.

The MILF and Manila have been observing a shaky truce since 2003 but the NPA continues to engage soldiers and police in tit-for-tat attacks.

On Monday, around 70 NPA rebels seized more than a dozen weapons from a jail in the south, the latest in a series of attacks in the south, where the MILF is also active.

Malaysia, which has been brokering the MILF talks since 2001, has started pulling out its unarmed peace monitors in the south due to lack of progress. Negotiations have been stalled since December 2007 over constitutional issues.

But, it has said it will continue to broker the peace talks.

Garcia denied that the government was dragging its feet on a deal with the MILF.

"We only wanted a deal that could be implemented smoothly," he said, adding the government was avoiding any legal loopholes that could torpedo any agreement it would sign with the MILF. (Reporting by Manny Mogato; Editing by Raju Gopalakrishnan and Alex Richardson)

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