UPDATE 1-Azerbaijan police arrest youths at anti-government protest

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* Show of solidarity with protesters in northern town

* Popular resentment over graft, wealth gap, joblessness (Adds quotes, context)

BAKU, Jan 26 (Reuters) - Police arrested about 40 activists demonstrating in Azerbaijan's capital on Saturday against President Ilham Aliyev's government and in support of residents of a northern town where protests were crushed this week.

More than 100 protesters gathered in central Baku, some chanting "Freedom!" and calling for the resignation of Aliyev, who succeeded his father in 2003 and has tolerated little dissent in the oil-producing former Soviet republic.

Police swiftly stopped the protest, forcing demonstrators out of a park and then arresting some in the street.

The protest was triggered by unrest in Ismailli, about 200 km (125 miles) northwest of Baku, where police used teargas and water cannon on Thursday to disperse hundreds of protesters demanding the resignation of a regional leader. Cars were torched and a hotel set ablaze in a night of rioting.

Unrest in Ismailli reflected frustration at what some Azeris see as an overbearing government, corruption and a big divide between rich and poor in the mostly Muslim Caspian Sea nation of nine million where many lack jobs, money and prospects.

Western governments and rights groups accuse Aliyev of rigging elections and clamping down harshly on dissent, and he is expected to win a new presidential term in October despite opposition from Azeris tired of his rule.

"Our patience came to an end. People are very unhappy with this regime. We demand a change of power in our country," demonstrator Malakhat Nasibova said at the protest in Baku.

The unrest in Ismailli began late on Wednesday as a brawl involving a local hotel owner who crashed his car, and rapidly spiralled into a riot involving up to 3,000 people.

Rioters set the hotel and cars in the courtyard on fire, before moving to the home of the regional governor's son, where a car and two motorcycles were set alight.

Mass protests are usually quashed quickly by police in Azerbaijan. Riot police dispersed a protest last March in the town of Quba, 170 km (100 miles) north of Baku, after hundreds of residents demanded the mayor resign.

Squeezed between Iran and Russia, Azerbaijan is also a transit hub for U.S.

"Riot police dispersed a protest last March in the town of Quba, 170 km (100 miles) north of Baku, after hundreds of residents demanded the mayor resign.Squeezed between Iran and Russia, Azerbaijan is also a transit hub for U.S"troops based in Afghanistan - a role its critics say limits Western powers' willingness to sanction Baku over human rights abuses and concerns about democracy.

Azerbaijan also supplies energy to Europe, and Western oil companies which bring oil through the Caucasus country would be concerned by any widespread violence and instability. (Reporting by Nailia Bagirova; Writing by Margarita Antidze; Editing by Louise Ireland and Steve Gutterman)