* Concern that security gains outpacing political reform
* EU is biggest donor to Somalia
* Says EU open-minded on form of govt, but there are rules
By Richard Lough
MOGADISHU, Feb 8 (Reuters) - Somalia's leaders must press ahead with political reforms or risk losing aid from the European Union, its biggest donor, the EU envoy to the Horn of Africa said on Wednesday.
While significant military gains have been made in the battle against al Qaeda-linked rebels in Somalia, foreign powers are frustrated at the slow pace of change in a political system plagued by corruption and infighting.
"We're not going to sit and benignly give money. If people through deliberate inaction choose to stall the process we will take note, which is a polite way of saying we will take action," Alexander Rondos, European Union Special Representative to the Horn of Africa, told Reuters.
"The culture of impunity must end," Rondos said on a flight from Mogadishu after his first visit to the capital since taking up the post on Jan. 1. He did not elaborate on what punitive actions the bloc might take.
The European Union is the biggest donor to Somalia, stumping up close to 1 billion euros between 2008-2013 for governance, education and development projects, as well as the stipends of an African peacekeeping force, police training and an anti-piracy task force.
Somalia has been mired in conflict and awash with weapons since the overthrow of dictator Mohamed Siad Barre in 1991. Rival warlords and then Islamist militants reduced the government to impotence.
Rondos, a straight-talking Greek politician, met Somalia's president and prime minister, who are tasked with drafting a new constitution, slimming down a bloated parliament and holding elections for top political posts by August.
He described his meetings with President Sheikh Sharif Ahmed, a former Islamist commander, and Prime Minister Abdiweli Mohamed Ali as "very good". A source involved with the talks said they were not "your usual diplomatic courtesy visit".
"KNOW THERE ARE SOME RULES"
Islamist militant group al Shabaab, which launched an insurgency five years ago, is stretched on three battlefronts by African troops in the capital and Kenyan and Ethiopian troops in south and central regions of the country.
But defeating al Shabaab will not mean peace unless there is tangible political reform that heralds a credible government, diplomats say.
The interim government, the latest in a string of transitional administrations in Somalia, has signed up to a political road map with an Aug. 20 deadline for elections but admits the tasks are huge.
Small steps are being made, including improved security in Mogadishu, but there remain huge question marks over what form the next administration will take.
"This transition has to keep up the momentum. Frankly, I don't care if (they think the deadline) is artificial. That's politics and they have to stick to it," Rondos said.
A car bomb that killed at least nine in the coastal city on Wednesday and a row that has sparked punch-ups in parliament and split the chamber with two factions claiming their own speaker, underscore the challenges ahead.
Some diplomats say it is former warlords in the assembly who are wary of losing influence who are spearheading the opposition to the reform process in parliament.
Rondos was born in Tanzania and educated partly in Kenya. His appointment is aimed at bolstering the EU's political clout in the volatile region.
He said further funding for Somalia would be a tough sell to EU member states if there was no demonstrable progress towards peace, security and civil order within a year.
"I'm insistent in saying we don't want to impose what that (political) system is, but know there are some rules," Rondos said he told the Somalian leaders. (Editing by David Clarke)