* Inquiry into illegal organisation within the state
* Files opened in Istanbul and Adana
* Govt seeks to end Gulen influence over judiciary
* Gulen's movement says being demonized
By Nick Tattersall and Ayla Jean Yackley
ISTANBUL, Feb 3 (Reuters) - Turkey is launching a criminal investigation into an alleged "parallel state" backed by a U.S.-based cleric and accused by Prime Minister Tayyip Erdogan of orchestrating a corruption scandal to unseat him, senior Turkish officials said.
A close ally of the cleric accused the government of conducting a campaign of 'incitements and lynchings".
The move intensifies a struggle at the heart of the Turkish state between Erdogan, its most powerful leader in over half a century, and preacher Fethullah Gulen, whose sympathisers say they number in the millions and whose network is thought over decades to have built influence in the police and judiciary.
The feud between the two former allies, whose marriage of convenience helped cement the rise of Erdogan's Islamist-rooted AK Party, poses one of the greatest threats to his 11-year rule and has raised concern about political and economic stability in the run-up to elections this year.
The investigation aims to expose the extent to which Gulen's Hizmet ("Service") network holds sway over public institutions and to charge those responsible with "forming an illegal organisation within the state", one of the officials said.
A second official said two files had been opened by prosecutors in Istanbul and the southern city of Adana and that formal proceedings would begin shortly.
"Such a structure within the state has become a matter of survival for us. We can't allow that and we will do whatever is necessary," Erdogan told a news conference at Istanbul airport when asked about the investigation, but did not comment further.
Erdogan has cast the graft scandal, which has led to three cabinet resignations and the detention of businessmen close to him, as an attempted "judicial coup" by Gulen's followers and has moved to purge the police and judiciary of his influence.
Thousands of police officers and some 200 prosecutors have been dismissed or reassigned since the corruption scandal erupted on Dec. 17, in what Erdogan's critics see as a ploy to stifle the graft investigations.
Gulen has denied orchestrating the scandal and has said his movement, which has a worldwide network of schools and views itself as a pro-Western, moderate force in Islam, is being used as a scapegoat.
"Part of the country's anti-democratic direction is an intense lynch campaign against Hizmet," said Mustafa Yesil, president of the Journalists and Writers Foundation, a group which has Gulen as its honourary leader and which has spoken on behalf of his movement in the past.
"The aim of these kinds of demonizations, incitements and lynchings is to distract attention from the corruption investigation," he told a news conference in Istanbul.
FIGHT TO THE DEATH
The government has denied the purge of the judiciary and police is aimed at halting the corruption investigation, describing it as the result of clear irregularities and insisting newly appointed prosecutors will pursue the cases.
"The principle of confidentiality of the investigation has been completely violated, evidence or pictures or allegations that were supposed to be in the court have been widely given to the media," the first senior official said.
"Statements by the prosecutor ... illegal wire-tapping, so on and so forth, they have all shown the extent of this set-up, this parallel organisation trying to bring down the government.
"When the government responds to the challenge, making changes within the judiciary, within the security forces, this is presented as interfering in judicial process. But rather this is a move against this parallel state," he said.
Erdogan's critics say the "parallel state" is nothing new, and that he is now turning on the very forces which he himself used to help break the grip of the army over Turkish politics, arguably his greatest achievement over the past decade.
The influence of the Hizmet movement in the judiciary is widely seen in Turkey as having helped the courts convict hundreds of officers on coup plot charges in a nation where the generals, self-appointed guardians of secularism, intervened to topple four governments in the second half of the 20th century.
"Hizmet's cooperation with the AK Party was based on principles ... on the hope for Turkey's democratisation, expectations of a new constitution, to contribute to the European Union process and for an improvement in rights and freedoms," Yesil said.
"But whatever happened, the AK Party after Dec. 17 appeared with a brand new discourse, a new agenda and different notions, while Hizmet defends the same principles."
Erdogan and Gulen have been at odds in the past, most recently late last year over government plans to close down some of the private schools through which the Hizmet movement generates funds and sympathisers.
In February 2012, Erdogan blocked an inquiry into his intelligence chief Hakan Fidan seen by his supporters as a challenge to his authority from a Gulen-influenced judiciary.
But this time, what is unfolding appears to be something of a fight to the death, the government bent on breaking the power of a network on whose support it for so long relied.
"What they did in the past to a certain extent the government supported," the first official said. "Of course when they turn against you, you have to fight back." (Additional reporting by Asli Kandemir in Istanbul and Orhan Coskun in Ankara; Writing by Nick Tattersall; editing by Ralph Boulton)
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