* Opposition chief seeking Qatar financial aid
* Rebels distrust Western motives
* Islamists a growing fighting force on the ground (Adds details)
By Khaled Yacoub Oweis
ISTANBUL, Jan 21 (Reuters) - Syrian opposition leaders said on Monday they had failed to agree on a transitional government to run rebel-held areas, dealing a fresh blow to their efforts to present a credible alternative to President Bashar al-Assad's rule.
The Syrian National Coalition (SNC) said in a statement that a five-member committee would put forward proposals on forming a government within 10 days, after talks in an Istanbul hotel broke up without agreement on an interim prime minister.
Formation of a government is seen as a threat to some members of the SNC, especially the Muslim Brotherhood, which would lose influence if a smaller executive body were elected.
The Istanbul talks, the opposition's second bid to form a government, have only highlighted divisions in the coalition and risk undermining support for the umbrella grouping, formed two months ago in Qatar with Western and Gulf backing.
Power struggles within the 70-member coalition have undermined efforts to agree on a transitional government, even as Syria slides further into sectarian conflict between the Sunni Muslim majority and Assad's minority Alawite sect.
"This is a big blow for the revolution against Bashar al-Assad," said one Syrian opposition leader who attended the meeting but who did not want to be named because he operates underground in Syria.
He said that half of the SNC opposed the idea of a transitional government altogether, even after the group abandoned a previous stipulation that coalition members would not be allowed to serve in the government.
The coalition, dominated by Islamists and their allies, said in its statement its five-strong committee would consult opposition forces, the Free Syrian Army and friendly states over the political and financial commitments needed to make a government viable.
Sources at the negotiations said on Sunday that SNC President Moaz Alkhatib had flown to Qatar to secure promises of financial aid for a transitional government in rebel-held areas.
Alkhatib, a moderate Damascus preacher, is on the committee, along with businessman Mustafa al-Sabbagh, who is close to Qatar, and tribal figure Ahmad Jarba, who has good ties with regional powerhouse Saudi Arabia.
Rebels have wrested large swathes of Syria from the control of Assad's forces but the opposition's failure to provide basic services, mounting reports of indiscipline and looting by rebel fighters have undermined public support for their cause.
Some coalition members in favour of forming a government to restore a semblance of order to rebel-run areas said the SNC, controlled by the powerful Muslim Brotherhood and its allies, had thwarted the proposal. The Brotherhood and supporters were not immediately available for comment.
The United Nations says at least 60,000 people have been killed in 22 months of conflict, and many fear rival regional powers could be drawn into the crisis should Assad's departure leave Syria divided along the Sunni-Shi'ite fault line.
That division has been deepening since the Arab Spring revolts began in Tunisia two years ago, toppling dictators in four Arab countries and ushering in Islamist political ascendancy.
The rise of jihadist rebels in the last few months as a dominant force in the armed opposition, and the possibility of a backlash by the Sunni majority against Assad's Alawite minority, has made international powers hold back from supporting the increasingly radicalised, mostly Sunni rebels.
INTERIM PM CANDIDATE
With little immediate prospect of an internationally brokered deal to remove Assad, any prime minister named by the coalition would have to be acceptable to rebels who have been making incremental gains on the ground despite massive air and artillery bombardment.
Naming a transitional government was part of the original agreement under which the coalition was formed last year.
But opposition sources say some distrust Western powers, believing they are influencing the formation of an opposition government that would negotiate with Assad and keep the minority-ruled police state intact.
The only name put forward at the Istanbul meeting as a possible transitional prime minister was Riad Hijab, a former Syrian premier - the highest ranking member of Assad's inner circle to defect since the revolt erupted in March 2011.
Veteran opposition campaigner Kamal Labwani, a respected former political prisoner, said Hijab would be an efficient cabinet chief despite his past in the Assad administration.
"Hijab should be given a chance. After two years of trying it is someone else's turn." (Reporting by Khaled Yacoub Oweis; Writing by Daren Butler; Editing by Jon Boyle)