(Reuters) - The group of 50 young men who had blocked off access to a small international military base in the Sinai desert would say nothing of who they were but their appearance held a few clues.

Dressed in army fatigues and armed with AK-47s, they wore the long beards of the hardline Islamists who are increasingly a law unto themselves in this part of Egypt.

Quietly, barely noticed by outsiders fascinated by upheavals in Cairo and other Arab capitals, they are building a presence in Sinai that might offer a new haven for anti-Western militancy at the strategic junction of the Mediterranean, Africa and Asia.

When finally one of the men broke a silence that hung heavy on the barren plain, it was to explain to a reporter their demands: for the government to release five comrades jailed for bombings of tourist resorts in Sinai more than six years ago.

"We are ready to die under tanks for this," he said, refusing to give his name and saying little else beyond muttering Islamic mottos as he toured the positions the militants had established to surround the base, inconveniencing dozens of troops from the Multinational Observer Force, a unit set up in 1979 to monitor Egypt´s U.S.- brokered peace treaty with Israel.

Under a rare rainy sky on a Thursday night in March, the men would only speak with the permission of a man they simply referred to as "sheikh". A wolf´s cry pierced the otherwise tranquil scene outside the remote base that is home to foreign peace observers including Fijians, Americans and Spaniards.

Not a shot was fired in anger, however, and the next day, the group lifted their eight-day siege. It was not because they feared arrest or attack by the authorities. But instead they had secured their demands. The government agreed to free the men accused of being part of a group which carried out the 2004 and 2005 attacks that killed some 125 people at the Red Sea beach resorts of Sharm el-Sheikh, Dahab and Taba.

It was a scenario unthinkable a year or so ago.

But with Hosni Mubarak´s removal from power after three decades, government authority has collapsed in much of Sinai, leaving a vacuum where Islamist militant groups are flourishing, posing a security risk to Egypt, neighbors including Israel, and the Suez Canal, the busy waterway linking Asia and Europe.

In Sinai, an arid peninsula the size of Ireland but home to fewer than a million people, groups at the extreme fringe of the Islamist spectrum are expanding, even as Islamists long outlawed by the state enter the political mainstream in Cairo, where they now dominate parliament and are poised to enter government.

In towns where police stations have stood deserted since Mubarak was swept from office after a popular revolt, hardline Islamists are imposing their own authority. They are preaching a strict interpretation of Islam that has brought with it religious intolerance of a kind that shocks even some of the more conservative forces in the Muslim world.

Hardliners were blamed for bomb attack last year on a shrine revered by Sufi Muslim mystics - the kind of attack more familiar in restive Pakistan Egypt.

Though some of the militants here appear to be inspired by al Qaeda, experts do not yet believe the network is operating in the peninsula that separates Africa and Asia. But as time passes and the Egyptian state in far-off Cairo struggles to assert itself, there seems a growing risk they may align more closely with the global movement now led by Ayman al-Zawahiri, himself an Egyptian, though long assumed to be based abroad.

Egypt has already paid an economic price for lawlessness in Sinai - a pipeline exporting natural gas eastwards to Jordan and Israel has been blown up 13 times in the last year.

There are fears the economic impact could run deeper still. With its Red Sea resorts, Sinai´s southern province is one of the main assets of a tourist industry that employs one in eight Egyptians and would be hit hard by more insecurity.

"I´d say there is genuine potential for this threat to grow and become a much bigger issue than it is now," said Henri Wilkinson, head of intelligence and analysis at the Risk Advisory group.

"I suspect al Qaeda ... sees great opportunity in Sinai."

"SOMETIMES VIOLENCE IS THE WAY"

For now, militant Islamist influence has been restricted to mostly impoverished towns in northern Sinai. Some are drawing on the example of groups that made Egypt a pioneer in the world of extremism as they seek to impose their vision of Islamic law.

One group calls itself Al-Tawhid wal Jihad, the name first taken by al Qaeda´s affiliate in Iraq. Blamed for the Sinai bomb attacks in 2004 and 2005, the group was accused last year of launching an attack on a police station in the town of el-Arish in which five members of the Egyptian security forces were killed.

Another is Takfir wal Higra, a name first heard in Egypt in the 1960s when the country emerged as a breeding ground for militant Islamist ideas that spread beyond its borders and supplied ideological fuel for al Qaeda and others.

Takfir wal Higra believes that even Muslims, if they do not share its beliefs, are infidels. The group´s influence has grown in northern Sinai in the last year, locals say. "Sometimes violence is the way to achieve your objectives," said a man in his 30s who joined the group a year ago.

He comes from a mountain village outside el-Arish, the main town in northern Sinai where residents have long complained of neglect by the Egyptian state.

Wearing a short beard, jeans and a black jacket, the Takfir wal Higra recruit declined to be named as he recounted stories of how members of the group from one family had forced their parents to separate after declaring their father an infidel.

"I am ready to participate in blowing up the pipelines ... attacking police stations," he said. But when pressed about his goals, he appeared uncertain, blending vague talk of freeing Jerusalem from Israeli control with the idea of establishing an "Islamic emirate" in the Sinai Peninsula.

In Sheikh Zuweid, a few kilometers (miles) from the border with the Palestinian Gaza Strip, that idea appears to have become a partial reality.

A newly renovated but empty police station in the town´s central square is a powerful symbol of the collapse of state control. Slogans daubed on walls declare Sinai an independent Islamic state.

THE POLICE LEFT, AND NEVER CAME BACK

"The police left the city on January 29, 2011 at 4 p.m. heading to Cairo and never came back," said Saeed Eteg, a liberal political activist from Sheikh Zuweid, recalling the day the state disappeared at the height of the uprising against Mubarak.

Sheikh Zuweid is a collection of mud brick buildings connected by a network of predominantly dirt roads. Locals say both state neglect and the collapse of traditional structures of tribal authority have allowed the spread of hardline influence.

Here, clerics apply their own interpretation of Islamic law at sharia courts independent of the state. "Decisions are for Allah alone," declares a banner outside one of the courts.

"People need someone to solve their disputes and they found the answer in religious courts," said Hamden Abu Faisal, a Salafi cleric who doubles as a judge in Sheikh Zuweid.

The Salafis are Muslims with a puritanical approach to their faith inspired by the official Wahhabi ideology of Saudi Arabia. Their brand of political Islam is a step removed from the more pragmatic, modernist Muslim Brotherhood, the biggest party in the Egyptian parliament, which is more moderate in its approach.

A Salafi group, the Nour Party, is the second largest party in the parliament following Egypt´s historic free elections late last year. It eschews violence in pursuit of its goal of tighter application of sharia religious law in the country of 80 million.

But even the Nour Party is beyond the pale for some in Sheikh Zuweid. Mohsen Abu Hassan, a member of the party, says he was declared an infidel by one young man, a member of Takfir wal Higra, during an election campaign rally in the town last year.

"There is a phenomenon we must confront," Abu Hassan, now a member of parliament in Cairo, told Reuters.

"We shouldn´t turn a blind eye."

A pile of rubble at a local shrine bears witness to the lengths to which zealots will go to impose their vision on how religion should be practiced here. On May 15 last year, five men blew up the shrine revered by Sufi mystics, whose beliefs are viewed as heretical by the puritanical Islamists.

A white flag raised by the Sufis flutters over what is left of the shrine of Sheikh Zuweid, viewed as one of the earliest Muslims in Egypt and after whom the town is named.

"WE DON´T FEEL LIKE EGYPTIAN CITIZENS"

Abdel Wahab Mabrouk, governor of North Sinai province, says religious groups are behind the trouble but denies the presence of al Qaeda or what he described as other "terrorist elements".

But Israel is worried. It is building a barrier along its 266 km (165 mile) border with the peninsula. One Israeli officer described the frontier today as "a hot border". Last August, Israel blamed Islamist militants from Sinai for attacks which killed eight Israelis. An Israeli counterstrike which left five Egyptian border guards dead did nothing to ease tense relations.

Israeli authority held sway in Sinai after it captured the region in the 1967 Middle East war. A theatre for more tank battles in 1973, the peninsula was restored to Egyptian control by the 1979 peace agreement brokered by the United States.

One of Israel´s concerns is that its Palestinian enemies in the Gaza Strip, including the governing Hamas Islamists, could use Sinai as a back door for attacks on southern Israel.

But the ideas spreading in Sinai could also present a threat to stability in Egypt itself and to Hamas, which looks to the Muslim Brotherhood for ideological inspiration and which has waged its own war against al Qaeda-inspired militancy in Gaza.

As in other waves of Islamist militancy that have swept Egypt in the past decades - it was Islamist gunmen who killed peacemaking President Anwar Sadat in 1981 - experts believe heavy-handed police tactics have only made the problem worse.

The security forces´ campaign to find the culprits in the 2004 and 2005 Sinai bombings has left a bitter taste. Police staged mass arrests, even rounding up suspects´ wives to force them to hand themselves in.

"THE MOTHER OF ALL PROBLEMS"

For the most part, South Sinai is a different story from the northern region. Bedouin in the mountainous south on the Red Sea maintain a nomadic lifestyle that differs to the urban development in the north, where many have settled in towns along the Mediterranean coast and have mingled with outsiders from Egypt´s Nile Valley heartlands and from neighboring Gaza.

Yet in southern Sinai, which is more sparsely populated than the north, Bedouin have similarly been alienated by years of state neglect and oppression. They too are staging acts of rebellion, though not in the Islamist form found in the north.

Seeking the release of jailed relatives, Bedouin have kidnapped two Americans, three Koreans and two Brazilians in the last two months, believing it is the only way they can get the Cairo government´s attention. They did not ask for ransoms and all were released unharmed after talks with the authorities.

The Bedouin say traditional tribal structures in the south have guarded against the infiltration of violent militant ideas. But their grievances against the state are just as profound.

The Bedouin say they have not felt the benefit of the income brought by tourist resorts such as Sharm el-Sheikh, which have given many thousands of jobs to Egyptians from the Nile Valley.

"We don´t feel like Egyptian citizens," said Sheikh Ahmed Hussein, a member of the Qararsha tribe, one of the biggest in the southern Sinai. A government report compiled in 2010 said a quarter of all Sinai´s population of some 600,000 did not carry a national ID card. The Bedouin, who make up the bulk of that number, are not allowed to own land or serve in the army.

Sensing the urgency of the problem, the military-appointed government of Prime Minister Kamal al-Ganzouri has taken action in the few months since it took office in November.

Seeking to alleviate tensions, Ganzouri has ordered the retrial of those imprisoned after the Sinai bombings. He also ordered the revival of development projects in the region, including a railway and a canal to supply water to central Sinai.

Abdullah Abu Ghama, a member of parliament from Sinai, says it cannot come too soon:

"The state has to speed up the process of development," he said. "If not, the mother of all problems will occur and extremists will increase in numbers." (Editing by Tom Perry and Alastair Macdonald) (© Thomson Reuters 2012. 04/01/12)