The Kremlin must accept that the biggest protests of Vladimir Putin's 12-year rule have changed Russian politics for good, dooming to failure any attempt to use force against the discontented, one of Putin's senior advisers said on Wednesday.

First Deputy Prime Minister Igor Shuvalov, the most influential liberal in Putin's cabinet, said the elite should not be afraid of the thousands of urban voters who have protested against a disputed December 4 parliamentary election.

In a clear attempt by Prime Minister Putin's most senior free-market advisers to steer their boss towards reform rather than repression, Shuvalov said the discontent had been brewing for some time and that it should be addressed with reform.

This is the new situation. It is here to stay, said Shuvalov at the opening of a conference on the economy in honour of the late architect of Russia's free-market reforms, Yegor Gaidar.

We should not be afraid of the current situation, said Shuvalov, who will next week will try to convince investors at the World Economic Forum in Davos to put money into Russia's $1.9 trillion (1.23 trillion pound) economy.

The country will be very alive in a political sense, unlikely it will be possible to suppress it, he said.

Putin, who is running for president in a March 4 election, was clearly taken aback by the scale of the protests, initially dismissing opponents as the pawns of the West and even branding them chattering monkeys.

But as the seriousness of the challenge became evident, Russia's most popular politician changed tack, reshuffling his team and approving some planned changes to open up the tightly controlled political system he still dominates.

REFORM OR REPRESSION?

Putin, who has ruled as president and then prime minister since late 1999, has presented himself as the anchor of stability in a turbulent world though he has offered conflicting signals on whether he will engage with protesters.

The protest leaders, a fragmented group of politicians, activists, journalists and bloggers, have called for a re-run of the parliamentary election which they was rigged. Official results show Putin's ruling party won 49.3 percent of the vote.

Powerful former spies in Putin's circle have called for tough measures against the protesters and even floated the idea of limiting the Internet which they say is being used by the West to meddle in Russia's affairs.

Shuvalov, who, since President Dmitry Medvedev's sacking of Finance Minister Alexei Kudrin, is now considered the most influential liberal in Putin's government said he regretted that many of the protesters did not appreciate the achievements made by the government during Putin's rule.

But the 45-year-old first deputy prime minister, who has been tipped by admirers as a future president, said the rise of the Internet and greater wealth had changed the political reality two decades after the 1991 fall of the Soviet Union.

We need to treat this as the new political reality, Shuvalov said, adding that when gross domestic product per capita reached $15,000 the political system would have to become more flexible and modern.

Russian nominal GDP will rise to $2.1 trillion this year, driving up GDP per capita to $14,918 this year from $13,235 in 2011, according to International Monetary Fund data.

Shuvalov said he regretted the government had not moved faster on privatisation, though he said the government would draft proposals for tax, pension and labour market reform in the spring.

(Reporting by Gleb Bryanski, Writing by Guy Faulconbridge; Editing by Giles Elgood)