ALGIERS, April 10 (Reuter) - The Algerian government has hurt prospects for peaceful change by making it impossible for the main Islamist party to contest a May 17 parliamentary poll, the country's top opposition Islamist said on Tuesday.

Abdallah Djaballah, leader of the main opposition El Islah party, said in an interview the authorities would deepen their isolation from ordinary people trying to recover from years of bloodshed if they continued tight curbs in the political arena.

"When you prevent Djaballah from any political activity, you are sending a signal that there is no hope in changing things through peaceful political activity and that the regime concentrates all power in its hands," he told Reuters.

"You can easily imagine the consequences of such behaviour on the people. We are far from a democratic system."

Djaballah was reacting to a statement by Interior Minister Noureddine Zerhouni that he did not consider Djaballah was Islah's chief because he had not held a party congress as required by law.

The statement was regarded by observers as an effective ban on El Islah contesting the poll because Djaballah, Islah's founder, enjoys wide support in the party.

Djaballah had complained the government had prevented him from holding a congress.

Islah is the main legal opposition party in the north African country, a major exporter of oil and gas to Europe.

The involvement of Islamists in elections has proved pivotal in Algeria's recent history. An Islamist uprising began in 1992 after the then military-backed authorities, fearing an Iranian-style revolution, scrapped an assembly election that an Islamist political party was set to win.

Up to 200,000 people were killed in the ensuing violence, which has subsided in recent years following several amnesties for insurgents but rumbles on in mountains east of Algiers.

Many of the leaders of the 1992 revolt have received amnesty but remain banned from political life. Djaballah has consistently opposed violence but shares the rebellion's broad political aims of setting up Islamic rule.

Djaballah said that if the government did not free up the political arena Algeria's conflict might reignite.

"Not tackling the roots of the crisis means that there is still a possibility for repeating the scenario of the last decade even if it is on a smaller scale. The recent (insurgent) attacks show that things are still not settled yet."

Djaballah said the government had acted because it knew that if the election was fair Islah, which holds 43 seats in the 389-seat assembly, would have won a majority.

"The regime has a problem with all the parties that have credibility and are not tools between its hands," he said.

The majority party is not guaranteed to provide the prime minister but wields wide influence. The presidency is the most powerful office of state. The premier plays only a coordinating role.

Djaballah said further efforts to control the political arena would only deepen a chasm between the government and the people and eventually stir even more support for Islamists.

"The regime will be even more isolated. There will be more anger among the people, and at the end of the day, the Algerians will support the opposition," he said.

A small faction of Islah which contests Djaballah's leadership is likely to stand in the poll as Islah but Djaballah said he would appeal to Algerians to boycott them.

The assembly is controlled by the conservative National Liberation Front of President Abdelaziz Bouteflika.