* Protests against Muscat's participation in EU summit
* Lawmakers' letter warns of "alarming" situation in Malta
* Draft resolution urges move on Malta that may lead to penalties (adds draft resolution)
By Francesco Guarascio
BRUSSELS, Dec 12 (Reuters) - Malta's Prime Minister Joseph Muscat should resign immediately to avoid risks of political interference with the investigation into the murder of journalist Daphne Caruana Galizia, the European Parliament told EU leaders on Thursday.
Muscat said on Dec. 1 he will resign in mid-January once a new leader of his Labour Party is picked. He took the step after his former chief of staff, Keith Schembri, was briefly arrested by police investigating the case.
Caruana Galizia's family say they suspect Muscat's government of a cover-up. Muscat denies any wrongdoing, as does Schembri, who resigned in late November.
In a letter delivered to leaders of EU countries as they met in Brussels on Thursday for a summit, the European Parliament urged the leaders to take a stance, saying a mission of lawmakers to the island had found the situation "alarming".
Muscat's "delayed" resignation "constitutes a serious risk, real or perceived, the murder investigation and connected investigations will be compromised," the lawmakers wrote.
Lawmakers also want the European Commission to begin talks with Maltese authorities that could lead to sanctions over the rule of law, a draft resolution seen by Reuters said.
The text, which will be voted on Wednesday, warned against "serious and persistent threats to the rule of law, democracy and fundamental rights," in Malta, including on the independence of the police and judiciary.
"SHAME ON YOU!"
Before the summit, dozens of people demonstrated in front of the Maltese permanent representation to the EU against Muscat's participation in the summit.
"Shame on you!", they shouted holding an image of Muscat with the writing "murderers" on it. They plastered a wall in front of the headquarters of the European Commission with the same image.
The EU leaders should not accept Muscat at their meeting, Andrew Caruana Galizia, one of the sons of the murdered journalist, told Reuters on the sidelines of the protest.
Muscat was photographed shaking hands with EU leaders at the summit later on Thursday.
The head of the centre-right grouping in the EU Parliament, Manfred Weber of Germany, told journalists it was a "huge scandal" that Muscat was still in office. He called for his immediate resignation.
The political stability of the Mediterranean island has been rocked in recent weeks by the fallout from the murder of the anti-corruption journalist, who was blown up by a car bomb in 2017.
Two people were accused of planting the bomb but for nearly two years police were unable to say who hired them. Last month, a man given immunity from prosecution confessed to being the middleman.
Since then, a businessman was charged with plotting the crime. Muscat's government denied him a request for immunity in return for testimony he said would implicate senior officials. (Reporting by Francesco Guarascio @fraguarascio Additional reporting by Robin Emmott Editing by Peter Graff)
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