* Main parties plan competing mass rallies that could spark violence
* Opposition threatens strikes unless governing party steps down before election
* Aborted election in 2007 led to takeover by military-backed govt
By Shyamantha Asokan and Serajul Quadir
DHAKA, Oct 20 (Reuters) - Bangladesh's two main parties are hurtling towards a showdown this week that could delay or even derail elections due by January in a country with a history of ferocious political violence and military intervention.
The mounting tension is a fresh threat to Bangladesh's $22 billion garment export industry, the economic lifeblood of the poor country of 160 million, which has already been rocked by a string of deadly factory accidents over the past year.
The ruling Awami League (AL) in 2011 scrapped a "caretaker government" system - whereby neutral leaders take over three months before elections and oversee polls - and is now refusing to step down by Oct. 24, as would have ordinarily happened.
The opposition Bangladesh Nationalist Party (BNP) says that, unless the government relinquishes power, its supporters will whip up nationwide strikes that are likely to be bloody. It is also threatening to boycott the elections.
"There will be a total deadlock," Mirza Fakhrul Islam Alamgir, the BNP's acting secretary-general, told Reuters. "When the government does not listen to our demands, what is the alternative?"
The deadlock raises the spectre of aborted polls in 2007, when a League boycott and clashes between rival party supporters led a military-backed government to take over for two years.
Even if the polls go ahead, the opposition might reject the results, which could spark more strikes and force a second election within months, as happened in 1996.
Last week, Prime Minister Sheikh Hasina sought to defuse the crisis, offering the formation of an all-party government to see through the elections.
While the BNP is likely to snub her proposal, Alamgir held out the prospect of a negotiated end to the impasse. Still, the BNP has vowed to press ahead with a rally in Dhaka this Friday, for which one party leader has exhorted supporters to come "prepared with arms".
The League plans to hold a competing rally on the same day, raising the risk of more bloodshed, said Mirza Hassan, a political scientist at BRAC University.
"This is a very combative move," said Hassan, whose university is part of Bangladesh's BRAC group, one of the world's largest development organisations. "They're all asking their party people to be out on the street."
Already security forces have killed at least 150 people and more than 2,000 have been injured during strikes and other protests this year, according to Human Rights Watch. Police have banned all gatherings in the capital in the run-up to Friday.
Factory bosses say that some Western retailers that source apparel from the world's second-largest clothing exporter after China have put orders on hold to see how the standoff unfolds.
"Some of the buyers are taking a back seat because they are waiting to see if there is unrest. If there are problems at the end of October, then maybe they will place orders elsewhere," said Kutubuddin Ahmed, chairman of the Envoy Group, which exports $200 million worth of garments a year.
Bangladesh's loss could benefit rival exporters Vietnam and Cambodia, even though they are more costly, Ahmed added.
Garment orders placed at an annual trade fair in Dhaka this month fell by 5 percent from last October, before a factory blaze and the collapse of Rana Plaza, a building that housed garment workshops, which together killed more than 1,200 people.
"The orders fell mainly due to a bad image after the Rana Plaza disaster, as well as the political uncertainty ahead," said S.M. Mannan, a vice president of the Bangladesh Garment Manufacturers and Exporters Association.
BOOTING OUT THE INCUMBENT
The caretaker system was started in the mid-1990s to ensure fair polls in a country where power has long changed hands between the two dynastic and mutually distrustful parties. Senior League members say they scrapped the arrangement partly because of disputes over whether caretaker government members themselves were unbiased.
"It's time that we go to the normal democratic practices that are used in all other countries," said H.T. Imam, an adviser to Prime Minister Sheikh Hasina.
But the League's critics say it wants to stay in power to massage the outcome of an election it is in danger of losing.
The League lost five mayoral elections over the summer, and - according to a July opinion poll conducted by Sydney-based pollster AC Nielsen and U.S.-based consultancy Democracy International - it enjoys the support of just 32 percent of the electorate, 11 percentage points behind the BNP.
The ruling party has been tainted by a series of corruption scandals, the most high-profile of which led the World Bank to cancel a $1.2 bn loan for an ambitious bridge project. Ditching the pre-poll caretaker system has also been unpopular.
The two parties differ little in terms of policy, analysts say, with voters simply booting out the incumbent with every poll in the hope that change will bring improvement.
WAR CRIMES FLASHPOINT
Another flashpoint between the rivals is a tribunal set up in 2010 to try those accused of human rights abuses during Bangladesh's war of independence from Pakistan in 1971.
The tribunal has so far convicted eight leaders of the BNP and Jamaat-e-Islami, the main Islamic party, sentencing six to death. Another court ruled in August that Jamaat-e-Islami was illegal, barring it from contesting in elections.
Both opposition parties have denounced the tribunal as a charade to eliminate the government's enemies, and more than 100 people have been killed in protests this year following war crime verdicts.
If the BNP remains committed to its boycott, international election observers might refuse to monitor and sign off on the polls, as they did after the League backed out in 2007.
"The same scenario risks being repeated now," said BRAC University's Hassan, referring to the scuppered election of 2007, though he added that the army may be reluctant to step in again after a difficult and unpopular two years in charge.
"If the AL goes to these polls unilaterally, there will be violence and then what will the army do?" he said. "One scenario is that they are forced to come in."
(Editing by John Chalmers and Ron Popeski)