* Year after ceasefire, fate of peace process unclear
* Ocalan says government has dragged its feet
* Erdogan focused on battling graft scandal
By Seyhmus Cakan
DIYARBAKIR, Turkey, March 21 (Reuters) - Jailed Kurdish militant leader Abdullah Ocalan called on the Turkish government on Friday to create a legal framework for their peace talks, whose fate is looking increasingly uncertain a year after he called a ceasefire by his fighters.
Tens of thousands gathered in Diyarbakir, the largest city in Turkey's mainly Kurdish southeast, for the Kurdish new year celebrations of Newroz, where they listened to a statement written by Ocalan in his island jail of Imrali near Istanbul.
The crowd waved Kurdish red, yellow and green flags and chanted "long live the leader Apo" (Ocalan) as his message was read out to the crowd in Kurdish and Turkish in a show of strength a little more than a week before local elections.
Prime Minister Tayyip Erdogan, battling a graft scandal swirling around his government, has invested considerable political capital in the peace process.
During his 11 years in power his government has broken taboos with some reforms such as authorising Kurdish language teaching and broadcasting, but Kurdish politicians are demanding greater political reform.
Ocalan said the two sides had tested each other's good intentions since the dialogue process began, but that the talks had not been legally binding and were not a sufficient guarantee for lasting peace.
"Both sides have emerged decisively from this test and this search for peace despite the government dragging its feet, acting unilaterally and avoiding a legal foundation," said the Ocalan statement, read out by two pro-Kurdish politicians.
"A legal framework has become unavoidable for the functioning of the negotiations," it added.
Ocalan and Turkish intelligence officials began peace talks in late 2012 and he declared a ceasefire at Newroz last year as a step towards ending a conflict which has killed about 40,000 people since his Kurdistan Workers Party (PKK) took up arms in 1984.
PKK fighters began withdrawing from Turkey to bases in northern Iraq in May but halted the withdrawal in September citing government failures to take steps to advance the process.
The ceasefire is holding despite isolated incidents of unrest. The PKK is designated a terrorist group by Turkey, the European Union and United States.
The pro-Kurdish Peace and Democracy Party (BDP) has pledged moves to boost autonomy after the March 30 elections, where their main rival in the southeast will be Erdogan's ruling AK Party.
"We were not afraid when resisting, we will not be afraid when making peace," Ocalan's message said. (Reporting by Seyhmus Cakan; Writing by Ece Toksabay; Editing by Janet Lawrence)