* Worker frustration sparks violent political protests
* Bosnia's 1995 peace deal sowed seeds of future crisis
* Ethnic dimension could appear as elections approach
* Country needs restructuring, but process fraught with risk
By Daria Sito-Sucic and Matt Robinson
TUZLA/SARAJEVO, Feb 11 (Reuters) - Enver Mehmedovic spends his days behind an iron gate, guarding the factory he used to work in from its owner.
Production lines that once produced 'Dita' detergent used in households up and down the former Yugoslavia now stand idle and Mehmedovic suspects that the tycoon from the Bosnian capital who bought the complex wants to sell off the machinery.
"That's what happened to all the other factories after they were privatised," said Mehmedovic, a chemical engineer.
Under socialist Yugoslavia, Tuzla in northeastern Bosnia was a hub for the metals and chemical industries. Today, the city's industrial zone is a wasteland and home to one in five of Bosnia's 27 percent registered unemployed.
The mismanaged transition to capitalism in the town is replicated on a smaller scale in all the former republics of Yugoslavia, which splintered two decades ago.
But Bosnia, where more than 100,000 people died in ethnic warfare between 1992-5, is different, and more dangerous.
Days of unrest that began with a protest by workers from Dita and other idled factories last week in Tuzla have blown the lid on years of simmering post-war discontent.
Rioters set fire to government buildings in some of Bosnia's biggest cities - Sarajevo, Tuzla, Zenica and Mostar and several hundred people were injured, most of them police in clashes with protesters.
"We are in unchartered waters," said Srecko Latal, head of the Sarajevo-based Social Overview Service think tank.
The grievances - unemployment, corruption and political paralysis - have their roots in the deal that ended the war, divvying up power to stop the fighting between Orthodox Serbs, Catholic Croats and Muslim Bosniaks.
The accord agreed at a U.S. air base in Dayton, Ohio, brought peace - and planted the seeds of a future crisis.
Its highly-decentralised and dysfunctional system of power-sharing has proven woefully unfit to steer Bosnia through economic transition or the process of integration with the European Union, to many their best hope of prosperity.
To ignore the grievances of the Dita workers means to risk an even bigger explosion. To address them means opening up the peace deal, and a Pandora's Box of competing agendas and ideas of how the country should be rearranged.
"Europe will try to use this crisis as an opportunity," a Western diplomat told Reuters. But while the violence may spur efforts to restructure the country, it also risks stirring the kind of ethnic undercurrents the protests have so far avoided.
Many in Sarajevo recoiled at the destruction wrought by the protesters - mainly Bosniak so far - the fire and smoke stirring painful memories of the wartime siege of their city by Bosnian Serb forces in the surrounding hills. A sixth day of protests on Monday was peaceful, but anger ran high.
"If we need to have a war, so be it," said Fehim Lovic, 58, a disabled war veteran who said he supports three children on a monthly welfare payment of 50 Bosnian marka (25 euros).
Latal said it was clear Bosnia needed a thorough overhaul.
A labyrinthine political set-up, in a country of just 3.8 million people, has scared off foreign investors and frequently paralyses government, feeding huge networks of political patronage that all sides are reluctant to give up.
The sale of Dita and other factories in Tuzla was in the hands of one of ten cantons in Bosnia's Federation - an autonomous region of mainly Bosniaks and Croats.
Each canton has its own prime minister and cabinet with broad executive powers.
On the other side is the autonomous Serb Republic, joined with the Federation at the state level by a weak central government and a rotating three-member presidency, both of which struggle to present any coherent national policy.
At least 40 percent of the workforce is employed in the public sector and parliamentarians earn around 3,500 euros per month, almost ten times the average monthly Bosnian wage.
The 100 or so workers still at Dita have not been paid for two years. For months, they and those laid off camped out in front of the factory and picketed the government building. Nobody received them. Finally, swelled by other workers and a hard core of youngsters, the protests turned violent.
Four cantonal prime ministers have resigned so far and the focus of the anger quickly turned to the presidency building in Sarajevo, the symbol of a broken state system.
"The protesters realise that the country's dire economic situation is not merely the result of corrupt officials, but rather of the constitutional order itself," Balkan affairs analyst Jasmin Mujanovic wrote in a blog post. "For the people of Bosnia, this is merely the beginning."
Comprised of a Serb, a Croat and a Bosniak, the presidency, pinnacle of the power-sharing model, has been challenged by the European Court of Human Rights in Strasbourg.
In a 2009 ruling, it said the Dayton constitution - in reserving high-level state jobs for the three former warring sides - is discriminatory.
Bosnia's political leaders have failed to agree on how to reform the system to address the court ruling, and until they do the country's bid to join the EU will go nowhere.
Serbian law professor Zarko Korac told Bosnian television: "Unless the politicians learn the lesson, unless they hear these people, the problem next time will be much bigger."
Piecemeal attempts by the West to prod Bosnia towards reform have run up against deep disagreement between the three communities over what their country should look like.
While Bosniaks want greater centralisation, Croat hardliners argue Croats should have their own entity and Serb leaders say they see no future in Bosnia at all.
Full-blown overhaul of Dayton will take years. But, analysts said, the protests may provide fresh impetus to reform at least the Federation, with a U.S.-brokered plan to streamline government there already before parliament.
The crisis may also give urgency to Western efforts to negotiate a deal to implement the Strasbourg court ruling, as Bosnia barged its way onto the agenda of an EU foreign ministers meeting on Monday.
"There is a growing concern, especially in the U.S., that there should be a new and different international engagement," said Latal.
The stakes are high.
While protests so far have been concentrated mainly among Bosniaks in the Federation, further unrest may take on an ethnic dimension, as each community seeks to protect itself from, or exploit, the turmoil.
Bosnia's Serbs have already accused the Bosniaks of trying to use the situation to push for abolition of the two autonomous regions, centralising power in Sarajevo.
In Brussels on Monday, Foreign Minister Vesna Pusic of former Yugoslav repubic and new EU member Croatia said it was vital the events in neighbouring Bosnia do not take on any "national tone" - a reference to its ethnic divisions.
"It's very important that all politicians, all public figures who have any responsibility do not push things in that direction," Croatian news agency Hina quoted Pusic as saying.
Several EU foreign ministers said Bosnia should be moved more quickly towards the EU, as a way to encourage reform.
"What happened in Bosnia was a wakeup call," British Foreign Secretary William Hague told reporters on Monday.
The movement has so far been largely spontaneous, fed through social media, but a political dimension is emerging, with some leaders speaking out in support of the protests ahead of parliamentary and presidential elections in October.
Bosnian Security Minister Fahrudin Radoncic accused the cantonal governments of robbing their citizens. He warned of a "tsunami of the citizens" without action.
For years, fear of a return to conflict has kept a lid on deep discontent. But many of those lobbing rocks at police last week were not even born when the war broke out.
"Older generations perhaps remember better times, or worse times during the war, but for us this is a situation that cannot get any worse," said Dzenita Hodzic, a 23-year-old student of forestry in Sarajevo.
She said she wanted to stay in Bosnia, but saw no future if she could only get a job by joining a political party.
"I feel sorry for these buildings," Hodzic said. "But it seems there's no other way. This is the only language our politicians understand."
(Additional reporting by Maja Zuvela; writing by Matt Robinson; editing by Philippa Fletcher)