* Ocalan seen as set to urge PKK to halt hostilities
* Peace process envisages reforms to boost Kurdish rights
* Conflict since 1984 has limited Turkey's growth (Releads with Ocalan statement)
By Daren Butler
ISTANBUL, March 18 (Reuters) - Jailed Kurdish rebel leader Abdullah Ocalan said he would make a "historic" appeal on Thursday, raising expectations of ceasefire in a 28-year-old conflict which has riven Turkey, killing some 40,000 people, and battered its economy.
Kurdish Peace and Democracy Party (BDP) leader Selahattin Demirtas, a member of parliament, conveyed Ocalan's statement on his return to Istanbul on Monday from a visit to his prison on the island of Imrali. A ceasefire could cement talks with the government that have been progressing tentatively since October.
"We want to solve the arms problem rapidly and without losing time or another life," Ocalan said in asking for the support of parliament and political parties to achieve a peace.
There was no immediate comment from the Turkish government, which says it seeks but will continue to counter PKK operations until they lay down their arms.
The PKK is considered a terrorist group by the United States and the European Union as well as Turkey. But Prime Minister Tayyip Erdogan has promoted contacts since a summer that brought a sharp worsening of the conflict with rising guerrilla violence and large-scale arrests of Kurdish activists in the south-east.
A ceasefire call, coinciding with the Kurdish new year, could be accompanied by a command to his Kurdistan Workers Party (PKK) militants to withdraw to bases in northern Iraq where the PKK says it keeps about half of its 7,000 fighters. Turkey, which has launched air raids and even ground operations against the bases, gives small numbers for the rebels' strength.
"The statement I am preparing will be a historic call. It will contain satisfying information on the military and political dimensions of a solution," said Ocalan, who was captured by Turkish special forces in Kenya 14 years ago and long villified as a murderer and 'baby killer' in Turkish media.
Ocalan was initially sentenced to be hanged for treason on Imrali, but this was commuted to life imprisonment. "Apo", as he is known to his allies, had been kept largely in isolation since then with no contact with his field commanders.
He was not allowed a television until a few months ago.
FIGHTERS IN THE MOUNTAINS
Truces have been agreed and failed before in the war, but this is the first time Ocalan and a Turkish prime minister have openly spoken of talks on a comprehensive settlement.
Justice Minister Sadullah Ergin said he expected a withdrawal of PKK guerrillas to bases in northern Iraq to be completed by the end of 2013, according to Milliyet newspaper.
Images of soldiers' coffins returning home have stirred deep emotions in Turkey. But allegations of human rights abuses by security forces in the southeast have damaged Turkey's image in the EU Ankara seeks to join.
The PKK had originally demanded full independence for a Kurdish state in southeastern Turkey, but has moderated its goals to broader political and cultural autonomy. Kurds account for some 20 percent of Turkey's 76 million population but are scattered through Western Turkey as well as the southeast.
In the course of the conflict investment in the southeast has slumped and poverty increased, putting a strain, beyond the human losses, on the Turkish economy as a whole.
In an initial confidence-boosting step, the PKK last week released eight Turkish captives which it had been holding at its bases in northern Iraq for up to two years.
Imrali island has long associations with the more turbulent chapters in Turkey's history. After a military coup in 1960, prime minister Adnan Menderes and two other senior ministers were hanged there. (Additional reporting by Gulsen Solaker in Ankara; Writing by Daren Butler; Editing by Ralph Boulton)