* New law seeks to pay back all dispossessed owners
* Romania trails other states in tackling past
* Old mentalities weigh on economy, frustrate investors
By Luiza Ilie
BUCHAREST, May 28 (Reuters) - Mihail and Valeriu Nitu spent 12 years fighting bureaucracy, corrupt officials and murky legislation to win compensation for their childhood home, which had been confiscated by Romania's former communist government.
By then, the government had suspended all payments.
The Nitus are among thousands of Romanians still waiting for the return of their property or compensation nearly 25 years after the fall of communism.
"Every government has come up with its own laws and has stalled for time," said Valeriu Nitu, 73. "I hope we will get the money in this lifetime, since there isn't much of it left."
Land ownership is still disputed, many communist-era officials remain in power, and inefficiency and corruption are entrenched. All that delays the move to a fully open economy to match other central European countries, much to the frustration of investors such as restitution fund Fondul Proprietatea .
With the exception of Poland, which deals with individual claims in court, former communist central European countries have restitution laws. Hungary, the Czech Republic and Slovakia have all largely completed the process.
But Romania has dragged its feet, compensating only some 15 percent of all claims but spending billions of euros in the process. The European Court of Human Rights, which has a backlog of cases against Bucharest, pushed it to adopt a new law in May.
Romania aims for full restoration - further straining a tight budget after a recession - but while the new law states property will be returned or replaced where possible, it also says cash for unsolved cases will be paid in tranches from 2017.
The Nitus' case shows the system at its cumbersome worst. They filed their claim in 2000 and went to court in 2010.
The court ruled in 2012 the family was entitled to 1.2 million euros for the sturdy brick house and 3,000 square metre yard, some of which was received for their grandfather's service in World War I, which was torn down in the 1980s to build drab apartment blocks. They have one other claim pending since 1998.
"That court trial we won was just for practice, so that we won't lose our touch," said Calin Ispravnic, the Nitus' lawyer, who heads a restitution organisation.
Up to two million Romanians are believed to have been killed, imprisoned, deported or relocated under communism and the country still bears the scars of Nicolae Ceausescu's repressive regime.
Swathes of old Bucharest were torn down to make way for his colossal, marble-clad parliament building.
Though it is now in the European Union, Romania is still in transition to a market economy and governments have failed to privatise large energy and transport firms that are inefficiently run, something the International Monetary Fund wants addressed before completing an aid agreement.
Romania ranks 116 from 144 states by institutional strength in the World Economic Forum's competitiveness report, far behind neighbours Bulgaria, the Czech Republic, Hungary and Poland.
The $4.4 billion Fondul Proprietatea - managed by emerging markets veteran Mark Mobius's Franklin Templeton - has pressed heavily for reform. Set up to compensate victims of communism, it holds stakes in many state-run companies and is pushing for more sales and better governance, with mixed success.
According to the Fiscal Council, an independent watchdog, Romania had 645 state-owned companies in 2011, accounting for only 6 percent of the economy but a third of all unpaid debts.
"The political establishment here still has a very big role in these companies, so it makes it more and more difficult to reform," Mobius told Reuters. "You meet these government people, they are young people but they are sticking to old ideas."
CONTEMPT FOR THE LAW
Many communist-era officials still hold prominent positions, even though current President Traian Basescu sought to draw a line in a 2006 speech which condemned the regime.
Basescu has been accused of allegedly collaborating with the Securitate secret police and was cleared by officials after its archives were opened. That was when many Romanians found close family and friends had spied on them.
Former President Ion Iliescu - who took part in the 1989 overthrow of Ceausescu that some claim was an internal party coup - is influential in the governing Social Democrat party.
Dan Voiculescu, a former senator whose family owns a media trust, was elected despite records showing he collaborated with the feared Securitate, as have several other lawmakers from across the political spectrum.
Fighting for property is so complicated that many plaintiffs sold their claims to others, who then made a quick profit. Government data showed one case went for $35,000 to an unnamed third party and was soon after settled for $69 million.
Prime Minister Victor Ponta said such cases were common and referred to a "restitution mafia", which the new law aims to stop by heavily taxing third parties and non-descendants.
Romania has so far paid 150 million euros cash, about 4 billion euros in Fondul shares and turned over thousands of buildings and 1.3 million hectares of farmland. It still needs to pay 8 billion euros - some 5 percent of its annual output.
"What persists are exclusivist mentalities inherited from communism," said Vladimir Tismaneanu, a political science professor at the University of Maryland.
"Contempt for the law, responsibility and universal norms that must govern institutions also stem from communism."
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