Leading Indonesian political parties on Friday rejected a government plan to raise fuel prices unless crude oil prices climb further, dealing a blow to the ruling party's efforts to control a swelling budget deficit.

Indonesia has the lowest fuel prices in Asia. The government wants a 33 percent rise from April 1 to reduce subsidy costs that threaten to undermine the budget discipline that led rating agencies to lift Southeast Asia's largest economy to investment grade status.

In the early evening, police fired tear gas grenades and used water cannon against thousands of demonstrators who rallied outside parliament to oppose a price rise, a Reuters witness said. There was no immediate word on casualties.

Earlier, other protesters blocked access to the toll road connecting Jakarta and its main airport.

President Susilo Bambang Yudhoyono's Democrat Party wants to change the law to allow a price increase if the Indonesia Crude Price (ICP), a basket of crude oil prices, rises to average more than five percent above a budget forecast for $105 a barrel. The price is currently 10 percent above that, at $116 a barrel.

But the Golkar Party, part of the ruling coalition and with the second largest number of seats in parliament, said on Friday it rejected a fuel price hike and would only support it if the ICP rose 15 percent above the budget forecast.

Golkar previously supported the fuel price hike but changed its mind after a week of protests across the country.

At the beginning of this debate, Golkar was leaning to understanding the government's stance. But when the people demanded, shouted and reminded us that Golkar is a party of the people, we of course reassessed our position, said Ahmadi Noor Supit, a Golkar lawmaker.

Protests over a fuel price hike helped spell the end for autocratic leader Suharto in 1998 and lifting prices would hurt the bulk of the country's 240 million people, many of whom live on a few dollars a day despite years of strong economic growth.

The latest manoeuvre by Golkar is a smart calculation ... this rejection of the fuel price hike could boost support for Golkar, said Syamsuddin Haris, a political analyst from Indonesia's Institute of Sciences.


Other parties also told parliament they rejected the hike or required a rise in the ICP price of up to 20 percent. Lawmakers are set to continue to thrash out possible options for a deal, though an April price increase now looks unlikely.

Failure to pass the proposal in parliament would keep inflation low but disappoint rating agencies that want the government to use the $18 billion it spent on fuel subsidies last year for much-needed infrastructure instead.

Lawmakers postponed the vote until the last minute as they feared supporting the move would hurt their popularity in the run-up to national elections in 2014.

Subsidies keep pump prices at just half the market rate, spurring fuel demand in Asia's largest gasoline and diesel importer and helping boost car sales to record highs.

Lifting prices by a third would only take them to a level reached in 2008 after Yudhoyono hiked prices following a oil price spike.

The president cut prices in 2009, as oil prices declined during the global financial crisis. His plan to lift them again comes as oil prices have surged because of concerns over Iran's exports.

At this late stage, failure to have the fuel price plan approved by the legislature would be a major political blow for the administration and likely to have economic repercussions, said Jakarta-based risk analysts Concord Consulting.

Without a price increase, the government sees the budget deficit widening to 4 percent of GDP, more than double the 1.5 percent it was aiming for this year.

However, the central bank has said lifting fuel prices will boost inflation above its target to over 7 percent, from 3.6 percent in February. It is also likely to dampen consumer spending, the main driver of the economy in the G20 member.

Indonesia, a former OPEC member, has long subsidized pump prices, as do other major producers such as Iran, but declining crude output and dilapidated refineries mean it relies on costly motor fuel imports.

Economists say weaning consumers off subsidies is critical to the country's long-term financial health.

(Additional reporting by Adriana Nina Kusuma and Reza Thaher; Writing by Neil Chatterjee; Editing by Matthew Bigg and Anthony Barker)