* Zoellick says bank ready to support Middle East nations
* Says Egypt's future "extremely difficult" to read
By Lesley Wroughton
WASHINGTON, Feb 2 (Reuters) - The situation in the Middle East is "fragile" with countries like Egypt and Tunisia caught in a dilemma of "partial modernization" in which the political system does not allow the masses to benefit from economic advances, the head of the World Bank said on Wednesday.
Interviewed by phone from Berlin as riots raged across Egypt, World Bank President Robert Zoellick said the lender was ready to move quickly to support nations in the region as they press forward with economic and political reforms.
"We are in a very fragile situation, not only for Egypt but for a number of countries across the Middle East," he told Reuters.
"It is extremely difficult at this point to read exactly what will happen" in Egypt, Zoellick said, adding that implementing economic and social reforms while political unrest rages was especially difficult. "Doing reforms in a midst of a revolution is a tricky prospect," he said.
Nine days of anti-government protests in Egypt took a violent turn on Wednesday when supporters of President Hosni Mubarak clashed with demonstrators who want an immediate end to his 30-year rule.
The uprising spread from Tunisia, where weeks of protests against poverty, repression and corruption toppled President Zine al-Abdine Ben Ali after 23 years in power. Protests have also hit Algeria, Jordan and Yemen.
Egypt has enjoyed stronger growth than most Arab nations and it has a relatively low level of poverty by international standards.
The problem, Zoellick suggested, was that countries like Tunisia and Egypt did not press forward aggressively enough with modernizing their economies after putting in place basic building blocks of growth, leaving a high level of unemployment, especially among youths.
"What we have seen is a partial modernization process ... at the stage of developing the ports, the infrastructure, the industrial zones, in creating those jobs to move up the value-added ladder these countries did not move far enough, nor fast enough," he said.
Zoellick said one of the lessons from the tensions in the Middle East was that economic reforms were not always enough.
"There is a sclerosis that takes different forms in different countries -- sometimes corruption, sometimes nepotism. This is where each country has its own unique circumstances," he said.
THREAT OF PARALYSIS
He said he was concerned the fast-moving events in the Middle East would paralyze other governments, including donor nations, as they try to digest the developments.
"Any time you have dramatic events like this, people understandably pull back to reflect and learn," he said. "But we shouldn't let this slip into paralysis.
Zoellick said the World Bank was in the process of withdrawing its staff from Egypt for security reasons, but said the institution remained focused on the situation.
"We are certainly on high alert in terms of being able to stay in close touch and see what we can try to do to alleviate the problems, and as they go through the appropriate transitions if they move to reform systems how we can try to support it," he said.
World Bank loans can help developing countries in a number of ways -- from providing budgetary support to funding infrastructure projects and social programs.
Zoellick said he was "cautiously hopeful" that Tunisia's transitional government would soon begin the process of moving toward democratic elections, which could open the door to economic and social reforms.
"In that situation I want to engage fast," he said. "This would be the worst time for the bank to be the development lender which takes a year to develop a plan."
"We need to be fast, if the Tunisian transition works, to be a support to them. It may be that in the Egyptian case it could be humanitarian," Zoellick added.
While some World Bank member countries might want to wait to see a track record of reforms before they offer aid, Zoellick said the institution was willing to show flexibility by supporting humanitarian agencies, which is outside its traditional mandate.
"I wouldn't preclude an engagement as it moves forward, but this is where certainly the political conditions will matter," he said. "If you have broad-based violence, if you have a sense of a country deep in conflict with itself, well who would we lend to anyway?" (Editing by Eric Beech)