* Two neighbouring towns show Lebanon's deep divides
* Syrian army victories over rebels near border raise tensions
* Car bombs and rocket attacks have hit Shi'ite areas
By Alexander Dziadosz
ARSAL, Lebanon, March 21 (Reuters) - From the Lebanese border town of Arsal, you can see the smoke as Syrian government warplanes bomb rebel positions across the frontier. But its problems are even closer.
Arsal is Sunni Muslim and the neighbouring town of al-Labwa is Shi'ite. Their fate shows just how dangerous the war in Syria has become for Lebanon as it still recovers from its own civil conflict.
Over the past three years, tens of thousands of Syrian refugees have more than tripled the population of Arsal.
Nowadays in its hilly streets, residents and refugees curse Hezbollah, the powerful Lebanese Shi'ite political and military movement whose fighters helped President Bashar al-Assad seize the town of Yabroud across the border this week.
Yet just 5 km (3 miles) down the hill in Shi'ite al-Labwa, Hezbollah's leader Hassan Nasrallah's face beams from billboards as residents denounce radical Islamists they say locals are letting use Arsal as a base to attack Shi'ites.
The towns have become a nerve centre of communal conflict in the country - a flare-up in tensions this week quickly set off protests across Lebanon in which at least one person died.
The two sides agree on little except that the situation is volatile, that the other side is to blame, and that the Lebanese army is not up to the task of restoring order.
"Hezbollah is the entire problem," Arsal's mayor Ali al-Hujeiri said in an interview this week.
"When one of their people gets martyred in Syria - we should only speak good of the dead, so we'll say 'martyr,' no matter who he was - when they lose in Syria, they make problems on the road from al-Labwa."
Hujeiri himself is wanted by the Lebanese government for alleged involvement in the murder of soldiers in the Arsal area, but in a sign of the limited state authority there, he has not been arrested.
There are now more than 100,000 refugees in Arsal, Hujeiri said, compared to the original population of about 40,000. Camps of plastic tarp and wood cover nearby hillsides and fields, practically constituting parallel towns.
In Arsal itself, young bearded men on motorcycles, some decorated with images of a black-and-white Islamic battle flag affiliated with hardline Islamist groups, clog the narrow, dusty streets.
CAR BOMBS, PROTESTS AND ROCKET STRIKES
Fighting across the border this week has made the situation in Arsal even more desperate and showed how quickly Syria's conflict can spill over and metastasize inside Lebanon.
The troubles kicked off on Sunday, when Syrian government forces backed by Hezbollah seized Yabroud, about 15 km from the border, severing one of the last rebel arteries into and out of Lebanon.
Within hours, a car bomb claimed by a hardline Sunni group went off in the Lebanese town of Nabi Osmane, killing at least three people and prompting men from al-Labwa, a stronghold of Hezbollah supporters, to pile sandbags on the road running uphill from their town to Arsal.
The closure severed Arsal from its only connection to Lebanon and set off demonstrations across the country by protesters who blocked roads, burned tyres and decried what they saw as a "siege" imposed by Hezbollah to punish the Sunni town.
One man was shot dead during the demonstrations, which ended on Wednesday when the army brokered a deal for the road to be opened and troops to deploy in Arsal.
Now, the military's Humvees and armoured personnel carriers mix with battered trucks and pickups on Arsal's streets and any Syrian rebel fighters who are in town are keeping a low profile. But few expect the calm to last.
"We all love the army here and support it fully," said one 56-year-old resident named Mohamed. "But the army - the army is in too deep. The army isn't able to fulfill the role it needs to fulfill."
OLD WARS AND NEW
Syria's conflict has revived bleak memories of Lebanon's own 1975-90 civil war and provoked fears that a new conflict could erupt in a country whose history of communal violence has long been interwoven with that of its dominant neighbour.
Lebanon has officially tried to distance itself from Syria's war, but the political factions whose squabbling has kept the government paralysed have become increasingly involved and have tried to leverage the conflict for domestic gain.
Meanwhile, more than 1 million refugees - about a quarter of Lebanon's population - have poured in, and rocket attacks, gun battles, suicide bombs and kidnappings linked to Syria's conflict have broken out across the country.
Few events have caused more controversy than Hezbollah's intervention, which supporters argue is necessary to defend its ally but which critics denounce as a blatantly sectarian move that contradicts the group's founding mission to resist Israeli occupation.
Mohamed, the Arsal resident, who asked his full name not be used so he could speak openly, said Hezbollah's involvement in Syria had created a "huge rift" in the area, with grim implications for Lebanon.
"Here in Arsal, near the border, there are families in town that are divided - in the same family you'll find some with Syrian IDs and some with Lebanese IDs. Naturally, I want to stand with my relatives, and they want to stand with the regime," he said.
"This situation does not lead to building a state. This situation leads to destruction. It leads to chaos."
He turned his gaze to a television showing the Lebanese parliament in session to give a vote of confidence to a new cabinet formed last month after nearly a year of deadlock.
"What new government?" he said. "This issue is bigger than them."
A GREAT BATTLE
Down the hill in al-Labwa, many residents are careful to say they do not have a problem with Sunnis in general, but largely blame local figures for letting the town become a staging ground for car bombs and rocket attacks against Shi'ite targets.
Many see Arsal as a den of radical Islamists from the Nusra Front, al Qaeda's affiliate in Syria, and the Islamic State of Iraq and the Levant, an al Qaeda splinter group, bent on fomenting sectarian hell in Lebanon.
"It's these gunmen who are controlling the situation. They're holding Arsal captive," said Mustafa Rabah, a former security officer from al-Labwa.
"If nothing falls on al-Labwa, if there isn't any harm or support (for armed groups), things will be fine. But if the rockets and car bombs continue, things will get worse again."
Mehdi al-Eitawy, a thickset man of 54 in al-Labwa, said the towns had lived in relative harmony before Syria's war despite their religious differences. Like other residents, he said people from Arsal and al-Labwa had intermarried regularly - something he couldn't imagine now.
"If I have a daughter and I want to give her away to someone in Arsal, and I don't dare go to Arsal, how can I send her?" he said as he sat with friends outside his coffeeshop on a street plastered with posters of Hezbollah fighters who died in Syria.
Now, he said, some people in Arsal acted like they lived in a separate state and needed a passport to visit al-Labwa. But it was the Islamist fighters, like those in the Nusra Front, who Eitawy identified as the major source of strife.
"I'm expecting there will be a great battle with the Nusra Front," he said.
"Between them and the army?" his friend asked.
"No," Eitawy said. "Between them and us."
(Editing by Angus MacSwan)