UPDATE 2-Protests simmer as Bahrain wins back Formula One

* Racing body has reinstated Grand Prix

* Daily clashes as police put down small Shi'ite protests

(Recasts with confirmation, date of race)

By Andrew Hammond

MANAMA, June 3 (Reuters) - Bahrain scored a much anticipated public relations coup on Friday by winning back its Formula One Grand Prix, cancelled earlier this year after protests erupted in the Gulf Arab island kingdom.

Majority Shi'ites demanding political reforms continued to stage protests, challenging the lifting of emergency rule two days ago that minority Sunni rulers called a return to normal conditions that could help bring back tourism and commerce.

"Congratulations - we got it!" Fayyad, a Sunni employee of a private airline, shouted in a cafe in Manama when news began to buzz in social media that a motor racing council meeting in Barcelona had agreed to reinstate the race later this year.

In February, Bahrain cancelled the opening race of Formula One after clashes between security forces and pro-democracy protesters camped out in their thousands at Pearl Roundabout.

Despite calls by human rights groups against reinstating the race, a source told Reuters that the vote for Bahrain had been unanimous. The race is now scheduled for Oct. 30.

"As a country we have faced a difficult time, but stability has returned; with businesses operating close to normal, the State of National Safety lifted and countries removing travel restrictions," said Bahrain International Circuit head Zayed R Alzayani.

"Collectively, we are in the process of addressing issues of national and international concern, and learning lessons from the recent past. By the time the Grand Prix arrives we will be able to remind the world about Bahrain at its best.

Alzayani said the race would attract 100,000 visitors, support 3,000 jobs and deliver a $500 million economic boost.

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This week the government ended over two months of martial law imposed after it invited Saudi and United Arab Emirates security forces to help break up the protest movement.

The government said the island state, on the frontline in a cold war between Shi'ite power Iran and Sunni Muslim Gulf dynasties allied to Washington, had returned to normal and was ready to host the event.

U.S.-based Human Rights Watch (HRW) and Bahraini rights activists had campaigned against reinstating the race in Bahrain, arguing that a heavy crackdown on the protesters during 11 weeks of emergency law should weigh in the decision.

The main opposition group Wefaq said it supported the government's efforts to get back Formula One, but many ordinary people in Shi'ite villages said they opposed it.

"We at Wefaq support hosting the event. It will force all the stakeholders to come together to find solutions ahead of the event," said Jasim Husain, a senior figure at the Shi'ite group.

But Abdelrazaq, a 47-year-old Shi'ite in the town of Diraz, said after Friday prayers: "How is this atmosphere appropriate for hosting such an event? The security situation should return to normal and people should get their rights".

Shi'ite villages have seen a number of small attempted protests since martial law ended on Wednesday, but police are heavily patrolling the districts to snuff them out or stop them reaching main highways.

Police fired teargas to break up a protest by some 500 people shouting "Down with (King) Hamad" and "Gulf forces out" in the village of Sanabis on Friday.

The protest began after the funeral of Zainab Ali Altajer, whose family said she died from the effect of a sound bomb during disturbances the day before. Activists said a man died on Friday from injuries sustained during the protests in March. An interior ministry statement said he died of natural causes.

Shi'ites say even if the emergency law has ended they suffer from the same security measures to stop them protesting.

This week the king offered a new dialogue on reform with all sides as of July, without spelling out its parameters. Wefaq and other opposition groups welcomed the offer.

But Sheikh Issa Qassim, the most revered Shi'ite cleric in Bahrain, told worshippers at Friday prayers the opposition would need a popular mandate to enter any talks and suggested the king's offer was not serious.

"Any political society, party or person will need a clear mandate from the street before entering any negotiations," he said. "Domestic security in any country is clear -- it comes from a serious initiative for reform ... The security approach is no longer able to keep people quiet." (Additional reporting by Hamad Mohammed; Editing by Reed Stevenson and Jon Hemming)