* Protesters throw petrol bombs, police fire rubber bullets
* Opposition says last week's election was rigged
* Djibouti a Western ally in fight against militant Islam (Adds new quotes, colour, details)
By Abdourahim Arteh
DJIBOUTI, March 1 (Reuters) - Riot police in Djibouti city fought street battles on Friday with protesters alleging fraud in last week's parliamentary election and demanding the release of detained opposition activists.
The unrest follows clashes earlier this week and raises the spectre of mounting instability in a Red Sea state that is an important ally of the United States in its fight against militant Islam.
Some protesters threw petrol bombs and security forces fired tear gas and rubber bullets to disperse crowds chanting "freedom" and "free our leaders", a reference to the detention of several moderate Islamists from the opposition.
"We won't stop until their release," Mahdi Ali told Reuters in the run-down suburb of Balbala, an opposition stronghold. The opposition rejects the result of last Friday's election and says the vote was rigged.
President Ismail Omar Guelleh's Union for the Presidential Majority (UMP) declared victory in Friday's vote, claiming 49 of the National Assembly's 65 seats.
Djibouti has been ruled since 1999 by Guelleh, effectively as a one-party state. Last week's vote was the first time the opposition had won a single seat in the assembly.
International observers reported no major violations of electoral procedures.
Opposition leaders called for demonstrations after Friday prayers to protest the disputed result and detention of Sheikh Bashir Abdourahim, a prominent opposition figure, and two others from the Movement for Democracy and Freedom (MODEL), a moderate Islamist party.
Other leaders of the main opposition Union for National Salvation (USN) are under house arrest, including the city's mayor, a USN spokesman said.
SMOKE AND BARRICADES
On Friday evening, plumes of black smoke swirled above Balbala as youths burned tyres, erected barricades and threw stones at armed police officers.
Djibouti's city centre was calm as dark fell. The police set up roadblocks on the bridge linking Balbala's congested streets to the downtown area.
The USN says more than 500 of its supporters have been arrested in the past week - a figure the authorities have not confirmed.
Interior Minister Hassan Darar had appealed for calm late on Wednesday and said any street demonstrations were illegal.
Djibouti hosts the United States' only military base in Africa. The former French colony's port is also used by foreign navies protecting the Gulf of Aden's shipping lanes, some of the busiest in the world, from Somali pirates.
The last time unrest broke out in Djibouti was in 2011 when anti-government demonstrators buoyed by the revolutions sweeping through North Africa demanded Guelleh step down. The authorities cracked down hard on the opposition. (Writing by Richard Lough; editing by Andrew Roche)