(Adds protest, paragraphs 5-7)
NEW DELHI Oct 14 (Reuters) - India promised Myanmar a $500 million credit line to improve infrastructure on Friday and praised steps towards democracy by its reclusive neighbour, which is tentatively opening up after half a century of harsh military rule.
The money and warm words came as Myanmar campaigns to shed its pariah status. It freed about 200 political prisoners this week, the latest sign of reforms in the poor and tightly controlled Southeast Asian country of 50 million people.
The former British colony also known as Burma has large undeveloped gas reserves and straddles busy Bay of Bengal shipping lanes, making it strategically important for energy-hungry emerging power neighbours India and China.
Myanmar President Thein Sein met Indian Prime Minister Manmohan Singh in New Delhi during a four-day state trip, spending two days visiting religious sites.
About 100,000 refugees and migrants from Myanmar live in India. A few dozen protested during Sein's visit to call for a faster pace of reform and the release of prisoners.
"Kick-start genuine political dialogue," read one placard held by a supporter of Myanmar pro-democracy leader Aung San Suu Kyi, who was freed from seven years of house arrest last November.
"We all have come here to support Aung San Suu Kyi and to demand a democracy," said a 16-year-old protester.
Hours after the prisoners' release, Myanmar's first civilian president in nearly 50 years flew to India's Bihar state to pay homage at the site where the Buddha is said to have reached enlightenment.
"The prime minister of India congratulated the president of Myanmar on the transition towards democratic government and offered all necessary assistance in further strengthening this democratic transition," they said in a joint statement.
India has long weathered criticism from international partners for its accommodating stance to Myanmar's junta, which was dissolved in April. New Delhi feels the signs of reform vindicate its policy of engagement.
The United State, Europe and Australia are unlikely to soften sanctions on Myanmar unless nearly 2,000 more political prisoners are released. Other Asian countries, however, are keen to access resources in the mainly Buddhist nation.
New Delhi put aside concerns about human rights in the early 1990s for fear of losing access to oil and gas as China stepped in with military assistance and loans to help the regime withstand sanctions.
India's efforts have only been partially successful, with planned roads and ports behind schedule. India part-owns two natural gas projects off Myanmar's coast in the Bay of Bengal but the gas is sold to China.
The $500 million credit line follows a similar $300 million scheme last year. The money will be used on infrastructure projects, particularly irrigation, the statement said.
India buys most of Myanmar's agricultural exports and wants its neighbour to raise output further by planting on idle land. (Additional reporting by Annie Banerji; Editing by Nick Macfie)