* Reform could boost Erdogan's prospects in expected presidency bid
* Pro-Kurdish HDP politicians to visit militant leader
* HDP leader denies deal to support Erdogan electoral bid (Adds lawmaker's quotes, clash overnight)
By Gulsen Solaker
ANKARA, June 25 (Reuters) - Turkey's government plans to present to parliament within days a reform bill to advance its peace process with Kurdish militants, in a move that may boost support for Prime Minister Tayyip Erdogan ahead of a presidential election in August.
Deputy Prime Minister Besir Atalay told reporters while in Bucharest on Tuesday that the government had completed work on a legislative framework for the peace process and was seeking ministers' signatures for the bill.
"I gave a presentation on it at the last cabinet meeting. A decision was made and within a couple of days we will present it to parliament as a draft law," he said in comments broadcast on Turkish television on Wednesday.
Atalay's comments come a week before the ruling AK Party announces its candidate - widely expected to be Erdogan - for Turkey's first direct presidential election, due in August.
Kurds account for around a fifth of Turkey's population, and their support could be decisive for an Erdogan bid, although an opinion poll this week suggested he could still win enough support without their backing.
The move also comes amid growing conflict in neighbouring Iraq between Sunni Islamist insurgents and government forces. While the Turkish reform package has long been on the table and is not seen as related to events in Iraq, it could in the long run also help cement positive relations with Iraqi Kurdistan.
Erdogan began peace talks with jailed militant leader Abdullah Ocalan in 2012 to end a three-decade insurgency by his Kurdistan Workers Party (PKK) that has killed 40,000 people.
Increased militant activity and street protests in recent months have sowed doubts over the prospects for a final deal.
Deputies from the pro-Kurdish Peoples' Democratic Party (HDP) were expected to discuss the bill with Ocalan when they visit him in jail on Imrali island this week, MP Pervin Buldan told Reuters. He said the deputies did not yet know what the bill contains.
"I anticipate he has received this bill and will share it with us. It has to be assessed as a positive step. It will give a legal guarantee to the process," she said.
Pro-Kurdish politicians have long sought such a guarantee. Party sources said they would need to see the contents of the bill before lending it their support.
"The law (will) recognise a negotiation process, providing an underlying state guarantee to shore up efforts until the ultimate goal of surrendering weapons is realised," lawmaker Idris Baluken, who has met both with Ocalan and the PKK to facilitate the process, told Reuters.
The legal framework should also include improved conditions for Ocalan, including allowing him to establish direct contact with the PKK and non-governmental groups.
"Right now we have no legal guarantees. We could be prosecuted and, simply put, face life in prison under the current laws if the climate were to suddenly change," he said.
According to the Hurriyet newspaper, the law will also facilitate the rehabilitation of militants.
Erdogan has invested significant political capital in peace efforts, boosting cultural and language rights at the risk of alienating some of his grassroots support. Ankara, the United States and the European Union call the PKK a terrorist group, and Ocalan remains widely reviled among Turks.
A ceasefire called by Ocalan in March 2013 has largely held, but the PKK halted a rebel withdrawal to bases in northern Iraq last summer, complaining about the slow pace of negotiations.
In a sign of how precarious the talks are, PKK fighters exchanged fire with a special forces unit in a rural district of Elazig province in eastern Turkey overnight, security sources said. No one was hurt in the incident.
Protests have flared up in the mainly Kurdish southeast in recent weeks over the construction of new military outposts, with demonstrators blocking a highway between Diyarbakir city and Bingol province. But that protest, which resulted in the deaths of two protesters, has now come to an end.
It was not clear if the reform package would ease tensions or guarantee Kurdish support for Erdogan.
HDP Chairman Selahattin Demirtas denied his party had made a deal with the AK Party to support Erdogan in the presidential election. Demirtas also indicated in an interview with Milliyet newspaper published on Wednesday that he may run for president.
The PKK took up arms against Turkey in 1984 with the aim of carving out a separate state in the southeast for the country's Kurds. They subsequently moderated their demands, seeking increased political and cultural rights which were long denied. (Additional reporting by Ayla Jean Yackley and Seyhmus Cakan; Writing by Daren Butler; Editing by Hugh Lawson)