* UN official sees "fragility" on frontier with Israel
* State institutions "not responding" to security problem * Concerned by Italian plans to cut peacekeepers
By Dominic Evans
BEIRUT, June 1 (Reuters) - Months of political paralysis and a crisis in neighbouring Syria have harmed Lebanon's security, a senior U.N. official said on Wednesday, days after a bomb attack wounded six U.N. peacekeepers.
Special Coordinator for Lebanon Michael Williams said the attack, which followed the kidnapping of seven Estonians and a deadly incident last month on the Israeli border, was part of an "eroding and deteriorating" security situation.
Lebanon has been without a proper functioning government since January when the Syrian- and Iranian-backed Hezbollah and its political allies brought down the government of Prime Minister Saad al-Hariri, who has Western and Saudi support.
Efforts to form a government have made little progress and the 10-week unrest in Syria has escalated tensions. Damascus ended a prolonged military presence in 2005, but remains a powerful player in a country still defined by the political and religious faultlines which fuelled its 1975-1990 civil war.
"We see signs of the security situation deteriorating in general, and disturbingly that the institutions of the state are not responding in the way that they should," Williams told Reuters at his U.N. office in the hills above Beirut.
He said the main concern was a political vacuum caused by the lack of government. Although Lebanese are accustomed to protracted wrangling over new cabinets, the current impasse was unusually fraught and likely to drag on for months, he said.
"The risk is greater now. One, because of the absence of a government. Two, because of the crisis in Syria. And three, because there is some fragility now along the Blue Line (U.N.-mapped frontier with Israel)."
The Israeli army fired on a demonstration at the Lebanese border village of Maroun al-Ras two weeks ago, killing 11 Palestinians marking the "catastrophe" 63 years ago of the founding of Israel, security sources said.
Similar protests may take place on Sunday's anniversary of the 1967 war when Israel seized the Golan Heights and West Bank.
Seven Estonians are still missing after being seized in Lebanon's Bekaa Valley after crossing the border from Syria in March, in a kidnapping which Williams and EU envoy Angelina Eichorst described as a dark reminder of Lebanon's civil war.
In another sign of fraying authority, rival security forces came close to confrontation last week in a standoff at a state-owned telecoms firm when caretaker Telecommunications Minister Charbel Nahhas was denied access to the building. "It is another indication of the deterioration in the security situation and the inability of state institutions to manage," Williams said.
The political standoff and security fears also threaten Lebanon's economy, with growth projections trimmed, tourism revenues expected to fall, and no progress on Lebanon's plans to explore for oil and gas in the Mediterranean.
"I frankly find it distressing and troubling that the country is losing opportunities now. It's obvious that the economic situation is deteriorating," Williams said.
Friday's bombing of the Italian peacekeepers, one of whom remains "in a very grave condition", was the first such attack in three years on UNIFIL.
"We don't see the attack in isolation," Williams said. "Although it is the first on UNIFIL in a very long time we see the attack in the present security context."
Expressing concern and surprise at Saturday's announcement that Italy -- which has the largest UNIFIL troop contingent -- will cut its peacekeeping force to 1,100 from 1,780, Williams said he would travel to Rome next week for talks.
UNIFIL was expanded to about 12,000 troops and naval personnel under a U.N. Security Council resolution which halted the 2006 Israel-Hezbollah war in south Lebanon.
It operates alongside 15,000 Lebanese army troops who are deployed to keep the peace and prevent weapons transfers in an area which is a stronghold of Hezbollah guerrillas.
Despite a deadly border clash last August, Williams said the cessation of hostilities since 2006 had held "remarkably well".
"What's been achieved is stability on the Blue Line and in southern Lebanon for the first time in decades. In a way that is why I am most worried now."