Just six months after South Sudan gained independence, severe inflation, rebellions and escalating tensions with Sudan are dampening the euphoria that followed secession and undermining efforts to build badly-needed state institutions.

South Sudanese celebrated the birth of Africa's newest nation on July 9 as they split away from Sudan at the climax of a 2005 peace deal that ended decades of civil war.

But hard realities have since set in. Disputes with Sudan's government in Khartoum have raged over issues from oil revenues to ending border violence. The countries' armed forces clashed in a rare direct confrontation in a disputed border region this month.

Even if peace with Khartoum holds, analysts say South Sudan - a war-torn and severely underdeveloped country bordering six states - could become a quagmire with several lawless regions and rising poverty.

About 2.7 million South Sudanese, roughly a third of the population, will need food aid from next year because of crop failures and widespread violence that killed more than 3,000 people in 2011, the United Nations says.

Violence on the border with Sudan has disrupted trade, pushing annual inflation to almost 80 percent, up from 57 percent in August. Inflation is 100 percent in some regions, analysts say, adding to the hardships of people already exhausted by decades of civil war.

The government has sold oil worth around $3 billion (1 billion pounds) since July but there are few signs it is channelling the money to development projects or shifting resources from the dominant armed forces.

South Sudan's leaders now have the choice to either continue to direct a huge percentage to the army and spend at a rate which will see the country to a budget deficit as early as 2020, or focus on specific and efficient development projects, Dana Wilkins at campaign group Global Witness said.

Nhial Bol, editor of South Sudan's independent daily newspaper The Citizen, said President Salva Kiir's cabinet and parliament have been slow to issue laws, while many guerrilla fighters-turned-officials have been unwilling to open accounts to public scrutiny.

The government is not delivering, Bol said. Corruption is a big problem. I have no idea where the oil revenues are going. It is not published, he said. The government had found the money to buy expensive cars for ministry officials, he added.

NO PROGRESS

Ravaged by civil war and neglect dating back to the British colonial era, South Sudan is one of the world's least developed nations. It has less than 100 km (62 miles) of paved roads and its budget depends almost entirely on oil revenues.

There is hardly any infrastructure outside the capital Juba, which buzzes with hundreds of consultants and aid workers. Aid groups provide basic services such as clean water in many regions of the country, roughly the size of France.

Adding to social pressures, more than 350,000 southerners have returned from Sudan and more than one million might follow once their legal status ends in Khartoum in April. They will need jobs and housing.

The country also needs to lessen its reliance on oil because its output of about 300,000 barrels per day will halve within a decade unless new finds are made, according to the International Monetary Fund (IMF).

There are some pockets of development, but overall not much is happening. The government does not have the resources to process projects and is not working efficiently, a coordinator at a large aid group said.

Diplomats say it was always clear that kickstarting development would be an uphill struggle, but rampant corruption and a lack of laws for almost every aspect of society are hindering progress.

At a U.S. investment conference this month, Kiir promised transparency but analysts say he is unlikely to do much because he needs to avoid upsetting the power balance of former commanders, tribes and veterans of his dominant Sudan People's Liberation Movement (SPLM).

Any sudden move against senior figures within the cabinet or the army would expose Kiir to accusations of tribal favouritism, Jean-Baptiste Gallopin, Sudan analyst at political risk consultancy Control Risks, said.

It could also trigger attempts to remove him from office. So we could see some improvement at the lower echelons of the bureaucracy, but high-level figures are likely to be spared from corruption investigations, he said.

The government has made some progress fighting rebel groups. Prominent insurgent leader George Athor was killed this month, and others have been convinced to accept an amnesty offer.

But John Prendergast, a former State Department official and co-founder of the Enough Project, said military solutions would not be enough.

Reducing intercommunal conflict in South Sudan will require security, economic and political measures. Further efforts need to be expended in enhancing opportunities for minority ethnic groups in state and national government, he said.

SQUEEZED BY KHARTOUM

Though a return to full-scale war with Khartoum seems unlikely, diplomats say tensions will get worse as both governments need revenues from South Sudan's oil.

Landlocked South Sudan relies on Sudan's export facilities to sell its crude. Analysts say plans to build an alternative pipeline to Kenya will not be viable for the foreseeable future.

The two old civil war foes have failed to agree on a transit fee Juba will have to pay to send its oil through Sudan, prompting Khartoum to halt exports temporarily last month.

There is no breakthrough at all in sight. Both are worlds apart, one diplomatic source said.

By regularly closing the poorly marked joint border, Khartoum is hurting South Sudanese regions which depend on food imports from the north and are awash with refugees escaping fighting in Sudan's South Kordofan and Blue Nile states.

Aid workers visiting border areas say the southern army is reinforcing checkpoints and other military bases.

As long as these border conflicts continue, South Sudan will not cut down on its army and military budget, which is a drain on resources needed for development, the diplomat said.

(Reporting by Ulf Laessing; Editing by Andrew Heavens)