By Ayla Jean Yackley and Seyhmus Cakan
DIYARBAKIR, Turkey (Reuters) - Jailed Kurdish rebel leader Abdullah Ocalan ordered his fighters on Thursday to cease fire and withdraw from Turkish soil as a step to ending a conflict that has killed 40,000 people, riven the country and battered its economy.
Hundreds of thousands of Kurds, gathered in the regional center of Diyarbakir, cheered and waved banners bearing Ocalan's mustachioed image when a letter from the rebel leader, held since 1999 on a prison island in the Marmara Sea, was read out by a pro-Kurdish politician.
"Let guns be silenced and politics dominate," he said to a sea of red-yellow-green Kurdish flags. "The stage has been reached where our armed forces should withdraw beyond the borders ... It's not the end. It's the start of a new era."
Prime Minister Tayyip Erdogan has taken considerable risks since he was elected in 2002, breaking taboos deeply rooted in a conservative establishment, not least in the military, by extending cultural and language rights to Kurds.
He must now carry a skeptical conservative establishment with him, just as Ocalan from his prison island must marshal and keep the obedience of fighters in the hills of northern Iraq. The road must be a rough one with suspicions on both sides.
"The language is the language of peace, we need to see it implemented," Interior Minister Muammer Guler said, condemning the absence of red Turkish flags at the celebrations.
Rebel fighters would withdraw to their bases in the mountains of northern Iraq, which they have used as a springboard for attacks on Turkish soil. The Turkish air force has frequently attacked the strongholds.
Ocalan's Kurdistan Workers Party (PKK), regarded by the United States, European Union and Turkey as a terrorist group, launched its campaign in 1984, demanding an independent Kurdish state in the southeast of Turkey. It has since moderated its demands to political autonomy and broader cultural rights in an area where the Kurdish language was long formally banned.
"There is a strategic shift happening," said Ertugrul Kurkcu, a parliamentarian from the pro-Kurdish BDP party. "The Kurdish liberation movement is moving from an armed campaign to a cultural one. And the PKK accepts this."
Ocalan, isolated from his fighters for over a decade, has won public backing for a truce from field commanders over the last week; but there have been signs of skepticism in their ranks. Last month, at a meeting with Kurdish politicians he accused them of unwarranted pessimism over peace talks.
"I'm angry with them," Ocalan said, voicing opposition to their "war system", or strategy.
There are still dangers of division over the terms of any deal or between the PKK figures negotiating it.
The live broadcast on national television of the scenes in Diyarbakir would have been unthinkable even a few months ago. Throughout the conflict, insignia of the outlawed PKK has been strictly banned. A huge bonfire was lit as Kurdish "Newroz" new year celebrations began, a soundtrack of Ocalan's past speeches playing over loudspeakers.
"War happens, but at some point you have to dress your wounds. This is our chance now," said Bedri Alat, 73. "I remember peace. My grandson does not. He does not remember when Kurds and Turks lived as brothers. This is a last chance."
DANGERS OF DIVISION
A settlement would lift a huge burden off Turkey, though it would be viewed with deep suspicion by hardline nationalists who fear Kurds would resume a drive for independence.
"The PKK is challenging the state and this is a display of power by them," said Ozcan Yeniceri, a parliamentarian from the MHP, Turkey's main nationalist opposition party.
"In place of a Turkish Republic, the road is being paved for formation of a federal independent Kurdish state."
The war has drained state coffers, stunted development of the mainly Kurdish southeast and scarred the country's human rights record. A peace would bolster the NATO member's credibility as it seeks to extend influence across the Middle East, and remove a stumbling block from its path to join the EU.
Two years ago, to the anger of hardliners, Turkish intelligence officers held secret talks with the PKK in Oslo and have been talking with Ocalan in recent months.
Truces have been declared and secret talks held with the PKK in the past, but expectations this time have been fuelled by the openness with which the talks have been conducted.
Leftist militants launched bomb and missile strikes on Turkish government and ruling party offices on Tuesday night in attacks which Erdogan said were aimed at derailing the peace process.
"Peace won't come just because the prime minister says so. A ceasefire isn't enough to guarantee my rights and freedoms," said Mustafa Guner, 22, a literature student in Diyarbakir, sipping tea at a nearby cafe in a restored caravanserai.
"I am hopeful, but I am also wary and I am anxious."
HARD ROAD AHEAD
If a ceasefire holds, the path to disarmament and the reintegration of militants will still be long and vulnerable to sabotage. The fate of Ocalan, "Apo" to his allies, also remains uncertain, but any move to release him could be strongly opposed by critics who see any settlement as threatening Turkish unity.
The prospect of talks with the PKK would long have outraged many Turks who revile Ocalan and hold him personally responsible for the bloodshed.
An upsurge in violence last summer appeared to lend momentum to the nascent peace process. Turkish intelligence officers began meeting Ocalan in October on his prison island in the Marmara Sea. In November, he proved his continued authority by ordering the end of a hunger strike by hundreds of jailed Kurds.
Growing Kurdish assertiveness in neighboring northern Iraq's autonomous Kurdistan region and in war-torn Syria have only added to the sense of urgency.
"We are ready for both peace and war," a group of PKK youths in militant fatigues, their faces wrapped in headscarves, said from the stage, their statement a reminder of a widely-held view that the conflict could flare up again if this peace bid fails.
At the cafe in Diyarbakir, student Resan Erdogan, 25, a Kurd who shares the prime minister's surname, said a PKK withdrawal too early in the peace process would be disastrous for Kurds.
"The PKK is our insurance. Any rights we have gained are because they fought for them," he said as the sound of fighter jets from the city's air base thundered above, a reminder of the heavy military presence Turkey maintains in the region.
Abdullah Demirbas, a Diyarbakir district mayor, said there were likely to be more attempts to sabotage the process ahead.
"There are deep forces who want war and they are pervasive. They feed off blood," he told Reuters.
"The PKK, Ocalan and the government must be brave... There is massive social support for this process. There is hope, albeit restrained. That stems from disappointments in the past."
Ocalan was first sentenced to hang after his capture in Kenya but the sentence was commuted to life imprisonment after Turkey abolished the death penalty in pursuit of EU membership.
Demirbas said this was a last chance for peace.
"The next generation is like a storm. It is more radical. It has never known peace between Kurds and Turks. Now you can still convince many of them, we can still win them over. But if we lose them this time, they will never listen to us again."
(Writing by Daren Butler; Editing by Nick Tattersall and Ralph Boulton)