(Updates army seizes ammunition, NZ calls on Fiji military chief to step down)

By Malakai Veisamasama

SUVA, Nov 1 (Reuters) - Fijian troops drove through the streets of Suva on Wednesday and took control of tonnes of ammunition from the waterfront, as political and security leaders met amid fears of a military coup in the South Pacific nation.

Military chief Frank Bainimarama has threatened to force Prime Minister Laisenia Qarase to resign unless he drops two contentious bills, one which will offer amnesty to some of those involved in a coup in 2000.

Police said troops forced their way onto a Suva wharf on Wednesday and illegally seized 7.5 tonnes of ammunition shipped from South Korea.

Police had refused to release the ammunition until the military guaranteed it would not be used against the government.

"There is nothing to be alarmed about," military spokesperson Major Neumi Leweni told Reuters earlier, adding the army were merely guarding the shipment of ammunition.

Fijian political leaders failed on Tuesday to remove the outspoken military commander, who is currently visiting troops in the Middle East, with soldiers staging exercises around Suva and sealing the main army barracks.

"We are very concerned about the possibility of a coup in Fiji," Australian Foreign Minister Alexander Downer told Australian Broadcasting Corp. radio.

Australia has placed two warships on standby to evacuate Australian citizens, said Downer.

Fiji has suffered three coups and a failed mutiny since 1987.

The coups have been racially fuelled, with indigenous Fijians fearful of losing political control of their island nation to ethnic Indian Fijians, who dominate the economy.

New Zealand Prime Minister Helen Clark urged Bainimarama to step down on his return to Fiji, while Australian Prime Minister John Howard said he strongly supported the Qarase government.

"The strong advice we have is the commander must himself follow the Fiji constitution," Clark told New Zealand media.

"One would have thought that if the president seeks to suspend him then those orders from a legitimate government should be followed," she said.

"If you want to be a player in any political system you should go into politics and you shouldn't be doing it from the military."

MILITARY THREAT

But Bainimarama on Wednesday again threatened to remove Qarase from office. "I'll be back to see that Qarase and his cronies step down," he told the Fiji Sun newspaper.

"Qarase is trying to weaken the army by trying to remove me. If he succeeds then there will be no one to monitor them and imagine how corrupt it is going to be."

Bainimarama said that while the leader of the 2000 coup, failed businessman George Speight, was in prison those that backed him were now in parliament.

He said he regretted appointing Qarase as interim prime minister following the 2000 coup. Qarase has since won two free elections.

"He betrayed our trust when he went back to team up with the very people who caused the political instability of 2000," Bainimarama said.

The United States said it could suspend aid if troops do not respect constitutional processes and the rule of law.

"Any action by the military to the contrary would severely affect Fiji's stability and its political and economic development," U.S. State Department spokesman Sean McCormack said in a statement on Tuesday.

Suva residents were nervous on Wednesday that Fiji was about to be rocked by further instability, with people staying away from the city's open air market and worried parents accompanying children to school to sit exams.

"These people are playing around with the future of our kids, who will go into their exams under stress -- its just not good enough," Saten Prasad, a parent, told Reuters.

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