Australian PM in Senate row

CANBERRA (Reuters) - Australian Prime Minister Kevin Rudd on Friday rejected upper house Senate changes to key employment laws promised by his government, extending a gridlock that could prompt early elections.

The opposition-dominated Senate earlier on Friday passed the centre-left government's Fair Work Bill in a reduced form, which would limit the impact of unfair dismissal rules promised by Rudd after his 2007 election victory.

The setback is the latest for the government, which controls the lower house but needs the support of the opposition conservatives, or the backing of all Greens and two independents to pass laws through the upper house.

"I would expect the Australian parliament to respect the will of the Australian people, who voted absolutely clearly at the last election," Rudd told state radio.

Rudd can call an early election for both houses if any laws are rejected twice by the Senate, with a three month gap between votes. The next scheduled election is in late 2010.

Veteran political observer Rob Chalmers said the gridlock and Rudd's huge support in opinion polls could open the door to an early election later this year or early in 2010, before the full impact of the global economic downturn hits the country.

An early poll would also allow Rudd to capitalise on disarray within the conservative opposition parties, who are arguing over policy direction and leadership.

"Now Rudd may feel justified in going early to the people on the grounds of the Senate's refusal to accept a clear election mandate on unfair dismissals protection," Chalmers said in his Inside Canberra political newsletter.

A weekend election in Rudd's home state of Queensland could also influence the prime minister's thinking, with reaction to the sitting Labor government there providing a litmus test for the mood of voters nationally.

"FAIRNESS AND DECENCY"

Rudd and his deputy Julia Gillard rejected Senate changes that would cut 500,000 workers from the safety net of unfair dismissal laws, sending the legislation back to the Senate.

"All this is about, all it's ever been about, all it ever will be about, is this side of the house believes in fairness and decency at work, and the (conservative) Liberal Party does not," Gillard told parliament.

Government opponents want unfair dismissal laws limited to small firms with the equivalent of 20 full-time staff, rather than 15 as sought by the government.

But one of two key independents, Steve Fielding, offered the government a compromise, saying he would accept 15 provided the number was flexible among full-time, part-time and casual staff.

The other kingmaker independent, Senator Nick Xenophon, was in negotiations with Gillard, who agreed to more than 200 minor changes.

Australia's union movement head Sharan Burrow said the Senate needed to back down and pass the government's laws to help protect workers who faced losing jobs due to the economic downturn.

"They (workers) need rights and protections more than ever as they face the consequences of the threat of loss of jobs, of economic constraint," Burrow told reporters.

Australian Greens Leader Bob Brown warned the conservatives and both independents that if they insisted on their changes, they risked Rudd calling another poll, possibly later this year. "Accept the judgement of the people in 2007 or face the ire of the people in 2009," Brown said.

(Editing by Dean Yates)