Analysis - Alleged bomb plot seen heating Middle East Cold War

DUBAI (Reuters) - Rivalry between powerful Gulf neighbours Saudi Arabia and Iran has entered a dangerous new phase after the United States accused Tehran of plotting to assassinate the Saudi ambassador to Washington.

The alleged plot, angrily denied by Tehran, comes at a critical moment in the Middle East's so-called Cold War that pits the Arab, Sunni Muslim kingdom of Saudi Arabia against the mostly Persian, Shi'ite Islamic Republic of Iran.

"Somebody in Iran will have to pay the price," Saudi Prince Turki al-Faisal, often seen as an unofficial foreign policy voice for the royal family, said in London on Wednesday.

It is too early to tell whether the heightened tensions between OPEC's top two oil producers will lead to recalling ambassadors, demanding sanctions or limiting Iranian visas for the coming Haj pilgrimage to Mecca in Saudi Arabia.

But with both countries supporting competing sides in the messy sectarian struggles embroiling Iraq, Lebanon and Bahrain, the stakes for Middle East stability could hardly be higher.

Undergirding Saudi Arabia's concerns is its fear that Iran may be using a nuclear energy programme to develop an atomic bomb that would fundamentally alter the dynamic of power in the Gulf. Tehran says its nuclear programme has only peaceful aims.

"It'll move to a new and higher stage of rhetoric and complicate the situation more in the Gulf because of the rivalry and the proxies being used by both sides," said Theodore Karasik, director of research and consultancy at Inegma in Dubai.

TWIN PILLARS

It was Iran's 1979 Islamic revolution that suddenly upturned relations between two countries previously described as the "twin pillars" that guaranteed U.S. security in the Gulf.

Although Saudi Arabia's powerful Wahhabi clerics had always denounced as heretical the Shi'ite school of Islam followed by most Iranians, they had viewed the Shah as a bulwark against any Soviet-inspired communist inroads into the Middle East.

For the revolutionaries decrying Western imperialism in the turquoise-domed mosques of Tehran, the ruling al-Saud family represented a corrupt monarchy that protected Western interests at the expense of downtrodden Muslims.

But in the marbled palaces of Riyadh, the fear that the new Islamic republic would export its revolution across the Middle East prompted a strategy of containment, including backing for Saddam Hussein's Iraq in its eight-year war with Iran.

When the U.S. and its allies toppled Saddam's Sunni-led regime in 2003, Saudi Arabia and Iran accused each other of supporting proxies amid the chaos. Tehran emerged as the strategic winner with its deadly enemy Saddam gone and an elected Shi'ite-led government in power in Baghdad.

One fear now is that tensions could translate into violence in countries where Iran and Saudi Arabia back rival factions.

"That's something I don't buy," said Karasik, pointing out that Iraq, Lebanon and Bahrain all had their own domestic dynamics that were more likely to drive events.

DANGEROUS TIMING

As Arab uprisings challenged the established order across the Middle East this year, the confrontation between Saudi Arabia and Iran has sharpened.

Protests by the Shi'ite majority against a Sunni monarchy in Bahrain, an island linked by a short causeway to Saudi Arabia, were seen in Riyadh as evidence of Iranian meddling.

Tensions rose yet another notch last week when Saudi Arabia's Interior Ministry accused an unnamed foreign power -- often code for Iran -- of instigating an armed attack by the kingdom's Shi'ite minority on a police station.

In Tehran, the authorities had noticed reports by U.S. diplomats, revealed in WikiLeaks cables, that Saudi leaders had secretly urged Washington to attack its nuclear facilities.

According to WikiLeaks, one staunch advocate of a tougher U.S. line against Iran was Saudi Ambassador Adel al-Jubeir, the target of the alleged assassination plot.

"The gloves are off," said Ali Ansari, director of the institute for Iranian studies at St Andrews University. "The danger at the moment is you don't have a U.S.-Iran confrontation, but you have a Saudi-Iran confrontation which is more dangerous because the Saudis are more aggressive in defending their position."

The latest round of tensions comes at a time when Saudi Arabia and Iran both face domestic difficulties.

Soon after the alleged plot was announced on Tuesday, Saudi Arabia said 88-year-old King Abdullah would soon undergo his second back operation in a year, raising new questions over his health -- and the royal succession.

In Iran, Supreme Leader Ayatollah Ali Khamenei and his former protege, President Mahmoud Ahmadinejad, have repeatedly clashed in a bruising political struggle.

"We (in the Gulf) always find Iran difficult to deal with," said Abdulkhaleq Abdulla, a professor of political science in the United Arab Emirates. "You don't know who you are dealing with and who is really in the driving seat."

(Editing by Alistair Lyon)