Bahrain appeals court acquits protest leader of Twitter insult

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* Court voids conviction of Nabeel Rajab over critical tweet

* Will examine Rajab's jailing for spearheading protests

* Bahrain in crisis for 18 months over Shi'ite reform demands

DUBAI, Aug 23 (Reuters) - A Bahrain appeals court acquitted leading rights activist Nabeel Rajab on Thursday of insulting some Bahrainis in a tweet criticising the veteran prime minister, his lawyer said, but he remains in jail over other convictions.

Bahrain, where the U.S. Fifth Fleet is based as a bulwark against Iran and any threats to oil shipping out of the Gulf, has been in turmoil for 18 months with majority Shi'ite Muslims agitating for democratic reforms in the Sunni-ruled kingdom.

Rajab, founder of the Bahrain Centre for Human Rights, was sentenced in July to three months in prison for suggesting via Twitter that residents of al-Muharraq district had made a recent show of support for Sheikh Khalifa bin Salman Al Khalifa, the prime minister, only for financial gain.

"The judge ruled his innocence. Nabeel and representatives of many foreign embassies were present. I was able to meet him for a few minutes," lawyer Mohammed al-Jishi told Reuters.

The state news agency BNA said the judge acquitted Rajab because he was not satisfied with the evidence put forward.

Rajab has led many demonstrations calling for a reduction in the powers of the Al Khalifa dynasty that has long ruled the Gulf Arab state. Analysts see the prime minister as a pillar of steadfastness in the government against opposition demands.

A hero to protesters but villain for those Bahrainis who fear the protests will bring Shi'ite Islamists to power, Rajab was sentenced to three years in prison last week on three charges of leading protests. Prosecutors said Rajab had incited violence against police.

Rights groups and Western governments criticised that case and the appeals court is due to examine it on Sept. 10.

Shi'ite-led unrest has persisted since a period of martial law last year that put down the uprising. The sides trade blame for almost daily outbreaks of street violence.

Opposition parties led by the Shi'ite group Wefaq are demanding full powers for the elected parliament to legislate and form governments. Many Shi'ites complain of political and economic marginalisation, a charge the government denies.

In response to the unrest, the Al Khalifas have increased parliament's powers of scrutiny over ministers and say policing is being revamped to conform with international standards.

Though the United States has pushed Bahrain's rulers to resolve the conflict through talks, it values close relations with the ruling family since it allows the U.S. Fifth Fleet to run its operations out of a Manama base.

Bahrain has been caught in a regional competition for predominance between Iran and U.S.-backed Saudi Arabia. Riyadh sent troops to shore up the government last year, while Iran has positioned itself as a champion of the opposition's cause while denying accusations that it is orchestrating the unrest.

Fifth Fleet warships help ensure oil exports flow freely out of the Gulf. Iran has threatened a blockade if its protracted stand-off with Western powers over its disputed nuclear programme degenerates into conflict.

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