Indonesia's parliament is set to vote on a controversial fuel price hike on Friday, with a leading political party threatening to scupper the plan in a move that could undermine confidence in Southeast Asia's largest economy.

The government wants a 33 percent rise in petrol prices, currently the cheapest in Asia, from April 1 to reduce a swelling subsidy bill that threatens to undermine the budget discipline that led rating agencies to lift the country to an investment grade status.

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

Lawmakers have been postponing a vote until the last minute as they fear supporting the move will hurt their popularity in the run-up to national elections in 2014.

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 still living on a few dollars a day despite years of strong economic growth.

Vocal protesters opposing the plan rallied across Indonesia this week, some clashing with riot police.

The Golkar Party, part of President Susilo Bambang Yudhoyono's ruling coalition, previously supported the fuel price rise but turned against it on Thursday. Without the support of Golkar, which has the second largest number of seats in parliament, the measure will not be able to pass.

The Golkar Party is of the view that at the present time there is no need to raise the fuel price, Golkar's secretary general Idrus Marham told local media late on Thursday.

Golkar's deputy chairman, Priyo Budi Santoso, said the party would feel more comfortable if the parliamentary vote was held in secret, leading analysts to suggest its sudden opposition was an attempt to look good in front of the public or to extract last minute concessions from Yudhoyono.

The latest manoeuvre by Golkar is a smart calculation for 2014...this rejection of the fuel price hike could boost support for Golkar, said Syamsuddin Haris, a political analyst from Indonesia's Institute of Sciences.

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 after being re-elected for a second and final term 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 hike, 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 subsidised 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.

(Reporting by Olivia Rondonuwu; Writing by Neil Chatterjee; Editing by Ed Davies)