INSIGHT-Broken Lebanon cannot afford war, and Hezbollah knows it

(Updates number of Hezbollah dead in paragraph 9)

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Lebanese state paralysed since financial collapse four years ago

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Big questions over who would pay to rebuild after any war

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Hezbollah battles Israel but has no interest in big war-source

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'Totally unacceptable' for Hezbollah to call the shots-opponent

By Laila Bassam, Tom Perry

BEIRUT, Oct 27 (Reuters) - With an economy in ruins and a crumbling state, Lebanon can ill afford another war between Hezbollah and Israel.

Iran-backed Hezbollah knows this and is keeping Lebanon's crises in mind as it plots the next steps in the conflict with Israel, sources say. As the war between Israel and Hezbollah's Palestinian ally Hamas reverberates across the Middle East, the risk of war between Hezbollah and Israel remains higher than at any point since their last big conflict in 2006.

Analysts say the Shi'ite group could escalate if Hamas appears to be on the ropes in the Gaza Strip 200 km (130 miles) away, while Lebanese leaders fear Israel could chose to instigate a major conflict with Hezbollah. But with Israel warning Hezbollah it would wreak "devastation" upon Lebanon were the group to open the front, the costs of any war loom large in a country already suffering one of the most destabilising phases since its 1975-90 civil war.

"Hezbollah has no interest in war. Lebanon has no interest in war", a source familiar with Hezbollah thinking said.

The group did not want to see the country destroyed and Lebanese fleeing from the south as thousands already have, the source said.

With state coffers empty, many also wonder who would pay to rebuild. Some question whether Sunni-led Gulf Arab states that financed reconstruction in 2006 would rush to help this time, given Hezbollah's bigger role in Lebanon. Hezbollah's clashes with Israeli forces at the border have been calibrated to avoid major escalation so far, sources say, though as of Friday 47 of its fighters have been killed since the Hamas-Israel war erupted. However, Hezbollah has also indicated a readiness for war, reflecting its position as the spearhead of an Iran-backed alliance against Israel and the United States.

Lebanese politicians have urged Hezbollah not to escalate, though they have little to no sway over its decisions.

"The fate of Lebanon is at stake," Druze leader Walid Jumblatt said, calling this perhaps the most dangerous phase he had seen in his political career.

He said there was nothing Lebanese could do to stop a war instigated by Israel.

"But from our side, we must control matters, via dialogue and advising the brothers in Hezbollah to keep the rules of engagement as they are," he said in comments to media.