* Wade withdraws election rule change after protests
* Police fire tear gas, rubber bullets in clashes
* Protests over election law change seen aiding incumbent
(Adds details, eurobond price, analyst)
By Diadie Ba and Finbarr O'Reilly
DAKAR, June 23 (Reuters) - Senegal President Abdoulaye Wade backed down on a proposed change to the country's electoral law on Thursday after the bill sparked running clashes between riot police and protesters in the capital.
Wade's rivals said the proposed change would have guaranteed his re-election against a fragmented opposition in a February poll and had threatened a popular uprising over it in a country long seen as an island of stability in West Africa.
Analysts said the reversal showed how effectively the opposition and civil society groups could mobilise anti-Wade sentiment amid simmering social tensions.
Despite the concession, protesters and members of the security forces, using tear gas and water cannons, continued to fight cat and mouse battles around the presidency and parliament. Rubbish and several vehicles burned in the streets.
Government spokesman Serigne Mbacke Ndiaye said that the president had "listened to the Senegalese people, development partners and religious leaders" and decided to keep the present electoral system where a candidate needs more than 50 percent of the vote to win in the first round.
The proposal had been to drop that figure to 25 percent -- a level Wade's rivals said would have virtually assured him a first-round win against his fractured opposition.
"It is a first step but I am waiting to see the final outcome of the text. We will maintain the mobilisation," leading opposition leader Macky Sall told Reuters.
Wade is also seeking to create the position of vice president -- a proposal that remains in the bill.
His rivals say the role is being proposed so he can pass on power to his son Karim, already a "super minister" in charge of a quarter of the nation's budget, but the government has said the position would not necessarily be filled by Karim.
UNDERESTIMATING THE OPPOSITION?
Senegal has long cherished its reputation as West Africa's most stable and democratic country and has had numerous peaceful elections over the past 50 years since independence from France.
But there are increasing concerns over the concentration of power around Wade, and growing frustrations over worsening public services and higher prices for staples.
"I think the government didn't expect such a strong reaction from the opposition and civil society," political analyst Djiby Diakhate said. "Behind this there is the problem of the daily problems in Senegal. We are talking about power cuts, floods, corruption high level of living."
"This law was just a spark that exposed the daily problems."
Shops were shuttered as Senegalese riot police earlier fired rubber bullets, tear gas and water cannon in clashes with stone-throwing anti-government demonstrators.
Thousands of students gathered outside the National Assembly building, where lawmakers were due to vote on the bill. There were reports of clashes elsewhere in Dakar.
"Listen to us, we are the voice of the people!" one protester shouted at a line of policemen in riot gear. Others, some wearing bandanas to protect themselves from the teargas, shouted "Liberate Senegal!"
Reuters witnesses saw several cars burning. There were also sporadic clashes between the anti-Wade protesters and a small group of his supporters.
The EU, a top Senegalese donor, had warned on Wednesday that the election rule changes risked undermining the credibility of the election and needed wider debate.
Senegal's eurobond slipped 0.015 cents to around 104.004 cents on the dollar by 1430 GMT.
"We are not at the stage where the market is ready to sell off just because of what's happening, but probably some foreign investors are a little bit nervous about the political outlook ahead of the elections," said Samir Gadio, an emerging markets strategist at Standard Bank. (Additional reporting by Bate Felix in Dakar and Carolyn Cohn in London; Writing by David Lewis and Richard Valdmanis; Editing by Andrew Heavens)
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