* Central bank chief says she quit over pressure on contract, account-sources
* U.N. envoy says resignation dealt "body blow" to donors
* Somali president denies corruption allegations
* West relies on Mohamud to fight militants, restore stability
By Drazen Jorgic
NAIROBI, Feb 14 (Reuters) - A resignation letter by Somalia's central bank governor sent from Dubai has thrown Western donors into a quandary over supporting a government they need to fight al Qaeda's local allies.
Governor Yussur Abrar quit after only seven weeks in the job, alleging she had been pressured to accept arrangements she believed would open the door to corruption.
With one email, she sucked President Hassan Sheikh Mohamud into a dispute over the recovery of frozen Somali assets from abroad, embarrassing foreign donors who have pledged billions to rebuild his shattered nation after two decades of chaos.
Divisive clan politics have bedevilled Somalia throughout its long civil war and more recent insurgency by the Islamist militants of al Shabaab, the local franchise of al Qaeda.
Western governments, determined to avoid another military involvement like in Iraq and Afghanistan, threw their support behind Mohamud, an Indian-educated former university professor and civil rights activist. They also strongly backed U.S.-educated Abrar, a senior international banker, when she became Somalia's first female central bank chief.
Now the two have fallen out. Mohamud denies wrongdoing and Abrar provided no documentary evidence to support her complaints in her Oct. 30 resignation letter.
Nevertheless, the allegations shocked Western diplomats and United Nations officials who have put so much faith in the president to restore Somalia's stability.
Nicholas Kay, the U.N. Special Representative to Somalia, described Abrar's resignation to the Security Council as a "body blow" to donor confidence. It underlined the need for stronger management of public finances, he said.
Diplomats said the U.N. Monitoring Group for Somalia, which presents its findings to the Security Council, is now investigating her allegations.
Abrar waited until she was in the United Arab Emirates before quitting. In her letter, which Reuters has reviewed, she did not accuse Mohamud of graft. However, she said she had "continuously been asked to sanction deals and transactions that would contradict my personal values and violate my fiduciary responsibility to the Somali people".
Without giving names, Abrar said she had been "undermined by various parties within the administration".
A former Citigroup vice president, Abrar said she had vehemently opposed a contract with U.S. law firm Shulman Rogers under which it is trying to recover the assets from abroad. This, she said, would "put the frozen assets at risk and open the door to corruption".
Abrar also said in her resignation letter that she had been warned by "multiple parties" that her personal security would be at risk if she went against the president's wishes.
Sources familiar with Abrar's version of events told Reuters that the pressure on her to sanction the contract had come from the president and his foreign minister at the time.
Abrar declined to elaborate publicly on her allegations when asked by Reuters, although she said in an email: "Tackling corruption was vital to create trust with international partners and to move the country forward economically, socially and politically."
Mohamud told Reuters he never put pressure on Abrar to sign any contract. "I have a very clear record in government since I came to power," he said on the sidelines of an African Union summit in Ethiopia.
A Shulman Rogers representative denied its contract opened the door to graft. "It is as clean a contract and as clean a deal as you can possibly have," he told Reuters.
The sources said that according to Abrar, the former foreign minister had also pressed her to open a bank account in Dubai against her wishes. Abrar resigned without opening it.
Mohamud told Reuters there had been no time "that I ever asked my governor to open an account in my name".
According to Abrar, the assets and money from Middle East donors would be channelled through the Dubai account before transfer to Somalia, the sources said. She believed this account would be controlled by the president, they said, and that money outside the central bank account could not be tracked, leaving it open to corruption and theft.
Abrar resigned only a few months after a conference when governments promised $2.5 billion to help rebuild Somalia, a pledge seen as a collective endorsement of Mohamud's leadership.
Four days after she quit, Western ambassadors - who live in Kenya and make only brief visits to Mogadishu as it remains a dangerous city - met in a luxury Nairobi hotel on a Sunday afternoon to thrash out their response.
One diplomat who was in the room said many ambassadors who backed Mohamud and the large amount of Western aid for Somalia under his presidency were "extremely angry, feeling betrayed".
A few days after the Nairobi meeting, envoys including from the United States and Europe met Mohamud at Mogadishu's heavily fortified airport - the journey to the presidential palace being too dangerous due to the threat of suicide bombers.
U.N. minutes of the meeting show envoys made their feelings known in a discussion about Abrar's resignation.
"Sweden, Norway, the US and the EU expressed their deep concern about recent events, noting that the confidence and trust in Somalia have been shaken tremendously," said the minutes of the Nov. 7 meeting, reviewed by Reuters.
In response, the president said Abrar had given no details of her concerns about the Shulman Rogers contract and that he had never threatened her, the minutes show.
Reuters spoke to 12 diplomats involved in Somalia and all said Abrar's version of events was credible.
Abrar's predecessor Abdusalam Omer signed the contract with Shulman Rogers. He resigned in September after a U.N. report said the central bank effectively functioned under his leadership as a "slush fund", with about 80 percent of withdrawals made for private purposes and not for the running of government.
Omer rejected the accusations in the report.
According to the sources familiar with Abrar's allegations, she said she had come under pressure to approve the arrangement with Shulman Rogers after she became governor.
However, the sources said she feared people involved in the search for the frozen assets, but not formally employed by the government or Shulman Rogers, would take a cut of recovered funds. She did not publicly explain the basis for this belief.
Shulman Rogers and a presidential spokesman said Somali businessman Musa Ganjab had been involved in the search. However, they denied the law firm or the government would pay him for this work or that he would take an improper cut of the recovered funds. Ganjab did not respond to a Reuters request for comment.
According to Abrar, pressure to approve the arrangement came right from the top, including the former foreign minister, Fozia Yusuf Haji Aden, and the president, the sources familiar with her version of events said.
"(This) never happened. I never came across it, I never asked, I never heard it, I only heard after she resigned (about) all these things, not before," Mohamud said.
Shulman Rogers told Reuters it had spent almost four years searching for the assets, which former governor Omer said included money in private Swiss bank accounts, gold held in foreign central banks, cash and real estate.
The sources said the tipping point for Abrar was pressure she says she came under from Aden and other officials to open the Dubai bank account. Saying she believed her safety was at risk, Abrar agreed to co-operate and fly to Dubai to open the account. Instead, when she arrived, she resigned and headed to the United States.
Mohamud denied that an account was to be opened in Dubai, adding that he instructed Shulman Rogers to put recovered assets into a central bank account. The U.S. law firm confirmed this and denied the Dubai account plan had existed.
Reuters requests for an interview with former foreign minister Aden made through the presidency were declined. However, a presidency spokesman said it was "absolutely not true" that Aden, who lost her portfolio in a January cabinet reshuffle, had put pressure on Abrar over the Shulman Rogers contract or the Dubai bank account.
Some diplomats interviewed by Reuters admitted that Western powers were unlikely to hold back aid or military support to Somalia worth hundreds of millions of dollars a year.
This, they said, would only destroy the president's authority and boost al Shabaab which wants to overthrow his government. But their trust in Mohamud will be restored only if he gets serious about tackling graft, they said.