* Sheikh Yassine formed Morocco's biggest Islamist movement
* He opposed monarchy but avoided street confrontation
* Group divided over whether to enter political mainstream (Adds quotes, background)
By Aziz El Yaakoubi
RABAT, Dec 13 (Reuters) - The leader of Morocco's main opposition group al-Adl Wal Ihsane died on Thursday, raising questions over the future of an Islamist group that played a central role in Arab Spring protests last year.
Abdessalam Yassine formed the group 1981. It is banned from formal politics but is believed by analysts and diplomats to be the only opposition organisation capable of mass mobilisation in the North African state.
It was a major player in protests last year that led the monarchy to institute constitutional reforms to dilute some of its extensive powers - an usual step for a group previously more focused on religion than politics and protest.
The protests petered out after Al-Adl Wal Ihsane (Justice and Spirituality) withdrew over disputes with secularists.
"With a heavy heart Al-Adl Wal Ihsane announces to its members, sympathisers, the Moroccan people and the Islamic nation the death of one of its great men, the great guide Abdessalam Yassine," a statement on its website said.
Hassan bin Najeh, spokesman for the group's youth section said Sheikh Yassine, born in 1928, had been suffering from influenza and his health had been frail for some time.
His funeral is set to take place in Rabat on Friday and could become a focus for anti-government protest.
It was not clear who would succeed Yassine, who served several terms in prison for opposition to the monarchy, and analysts saw conflict over the future direction of the group.
"He was one of the great opponents of the monarchy. He could have gathered hundreds of thousands of people in a city like Casablanca but never did because he wanted avoid confrontation," said political scientist Maati Monjib.
"After his death, there will be a fight between the different wings of Al-Adl Wal Ihsane that want to focus on politics and preaching, which could cause a split."
The group stands apart from the Islamist PJD party, which was formed in the late 1990s and won elections last year that had been brought forward as part of the king's efforts to end the protest movement.
While King Mohammed allowed the PJD leader Abdelilah Benkirane to form the first Islamist-led government in Morocco, Sheikh Yassine's group remained outside the system for its refusal to recognise the king's self-styled status as "Commander of the Faithful".
That position would almost certainly have to change if the group sought to move into the political mainstream.
"People will be waiting to see who will replace him and whether that results in a new direction. Number one issue is whether they'd move to forming a political party," a Western diplomat said. "The constitution is clear that you have can't political parties that are overtly anti-monarchy."
The group also views the constitutional changes that, on the face of it, limited royal control to military, security and religious affairs, as only cosmetic.
"People are now convinced the steps taken in Morocco are more or less superficial, which is exactly how the regime responded to pressure in the past," its spokesman Fathallah Arsalane told Reuters last week.
"It's become clear that it is the monarchy in control."
Many Arab Sunni clerics disapproved of the strong flavour of Sufism, or Islamic mysticism, to Yassine's group, which was not close to organisations such as the Muslim Brotherhood in Egypt or Ennahda in Tunisia that have risen to power after the uprisings there. That limits their danger for the authorities.
Yassine, who hailed from a Berber village in the south of Morocco and grew up in Marrakech, was jailed for three years after he addressed a letter to King Hassan in the 1974 calling for implementation of sharia, or Islamic law.
He was held for two years again after forming his political group and spending 10 years under house arrest until King Hassan's son succeeded him in 1999.
He called on the new king too to turn to the "true Islam" and surrender the monarchy's assets to the state but while the authorities left him alone, his party remained banned. (Reporting by Aziz El Yaakoubi and Andrew Hammond; Writing by Andrew Hammond; Editing by Alison Williams)