UPDATE 1-Libya's eastern central bank warns unification in peril

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BENGHAZI, Libya, June 28 (Reuters) - Libya's eastern central bank branch demanded cash from Tripoli on Tuesday, accusing it of disregarding the bank's reunification after years of division during the conflict and indicating it could resume money-printing operations.

The Central Bank of Libya (CBL) split along with other state institutions after rival eastern and western factions went to war in 2014, but started reunification work in 2020 as part of a peace process after a ceasefire.

However, the peacemaking is under increased strain with rival factions again backing different governments and any new moves towards economic division could make a wider escalation more likely.

The split between the central banks, when Tripoli cut off the eastern branch from electronic money-clearing operations, contributed to a major liquidity crisis as exchange rates diverged and people and businesses resorted to cash.

In the east, with commercial banks facing major financial problems, the eastern CBL branch had its own banknotes printed in Russia. Russia, along with the United Arab Emirates and Egypt, backed eastern forces during the civil war.

The eastern CBL said on Tuesday it had stopped printing money "as a goodwill gesture" during the reunification process, but accused the Tripoli CBL headquarters of a mindset of division and of depriving it of liquidity.

"If we are not provided with liquidity of 500 million dinars ($104 million), the door will open to alternative solutions" it said in a statement, without elaborating.

This month the eastern-based parliament, which has appointed Fathi Bashagha as prime minister despite the Tripoli administration refusing to step down, approved a 90-billion-dinar budget for his government.

However, the CBL in Tripoli has not yet acknowledged the parliament's budget and appears to still be working with the government of Abdulhamid al-Dbeibah in the capital.

The United States is pushing for a financial oversight mechanism to ensure transparent and fair distribution of Libyan oil revenue to stop either side viewing disputes over access to state funds as a cause for conflict.

However, as the political crisis has intensified, factions in the east have blocked some Libyan oil production, depriving the state of revenue as a tactic to demand Bashagha's installation in Tripoli.

(Reporting by Ayman al-Warfali and Ahmed Elumami, writing by Angus McDowall; Editing by Jon Boyle and Mark Heinrich)

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