UPDATE 2-Anglican Church head backs protesters on financial reform
(Adds City of London Corporation suspends legal action)
* Cathedral in disarray over handling of camp on doorstep
* Archbishop says time to reform financial system
* St Paul's drops threat to evict protesters, opens dialogue
By Keith Weir and Avril Ormsby
LONDON, Nov 1 (Reuters) - St Paul's Cathedral, in the heart of London's financial district, has for centuries occupied a delicate position between God and Mammon, benefiting from the generosity of rich financiers while supporting the more numerous poor.
The tents erected on its doorstep by protesters against the excesses of modern capitalism and its huge inequalities in wealth have presented the Church with an excruciating dilemma -- should it side with them or the bankers they criticise?
Archbishop of Canterbury Rowan Williams, the head of the Church of England, stepped into the debate on Tuesday, backing calls by the Vatican last month for sweeping reforms of the world economic system and the creation of ethical regulation of financial markets.
"The best outcome from the unhappy controversies at St Paul's will be if the issues raised by the Pontifical Council can focus a concerted effort to move the debate on and effect credible change in the financial world," said Williams, spiritual leader of the world's 80 million Anglicans .
The domed church, which was badly damaged but survived the blitz while London burned in World War Two, has lost two senior clergy over its handling of the anti-capitalist protesters who set up camp over two weeks ago, after they were blocked from the nearby London Stock Exchange.
The uninvited guests have ignited a clash between Church of England principles and the practicalities of running London's largest cathedral, which attracts 820,000 visitors a year from around the world.
Williams highlighted three elements in the Vatican document -- separation of ordinary retail banking from higher risk investment activities, recapitalisation of banks with public money and most controversially a financial transaction tax.
"If religious leaders and commentators in the UK and elsewhere could agree on these three proposals, as a common ground on which to start serious discussion, questionings alike of protesters and clergy will not have been wasted," he added in a commentary on the Financial Times website.
The British government has said it would support a financial transaction tax only if it were adopted globally and was not limited to Europe.
A stand-off at St Paul's between money and morality has shone an unwelcome spotlight on Britain's main Christian Church.
"It would have been impossible for St Paul's to give full-throated support to the protests," said Paul Bickley, a commentator with the religious think tank Theos.
"St Paul's can challenge the City but it can't be against the City. Those bankers are part of its parish," he said.
Reversing its previous approach, the cathedral authorities on Tuesday put on hold plans to evict the protesters and began a dialogue with them instead.
The City of London Corporation, which owns some of the land affected by the protest camp, also said it was suspending legal action against the protesters in support of the cathedral and to give time for reflection.
Bishop of London Richard Chartres invited banker Ken Costa, former chairman of UBS Europe and Lazard International, to lead a panel aimed at "reconnecting the financial with the ethical".
Giles Fraser, who stepped down from St Paul's leadership last week, will help to ensure the protesters' views are heard.
Fraser, a senior cleric in charge of the cathedral's ties to the City of London financial district, resigned last week when his initial defence of the protesters backfired as their number grew.
The Dean, Graeme Knowles, resigned on Monday after first closing the cathedral doors to visitors and then reopening them after daily revenues of up to 20,000 pounds evaporated.
St Paul's, rebuilt by architect Sir Christopher Wren in the 17th century after the Great Fire of London burnt down its predecessor, styles itself a "centre for arts, learning and public debate".
Its location in the financial district enables it to benefit from the largesse of big business.
St Paul's website lists the benefits for city firms of corporate partnership schemes including free entry for staff and discounts on conference and entertaining facilities.
The cathedral's 2010 income was more than 15 million pounds, most of it from admission fees. Charitable donations in the last decade, including contributions from global banks such as Goldman Sachs, UBS and HSBC, totalled an additional 40 million pounds to help restore its white stonework.
Jonathan Bartley, a director of the Christian think tank Ekklesia, said the cathedral's location heightened the dilemma it faces.
"St Paul's will be very acutely aware of its position, its relationship with the City," he said.
The protests have also exposed contradictions in the financial stance of the Church, which has major investments in public companies. "They are embroiled in the system they are criticising," added Bartley.
Michael Colclough, the Cathedral canon pastor, said the wealthy backers of St Paul's also had a social conscience.
"A lot of these people are very generous to needy causes, and I don't think there is this great dichotomy between London City men with money and people in need because a lot of them give far more than you and I can imagine," he said.
(Additional reporting by Stefano Ambrogi and Sarah White and; Editing by Tim Pearce)
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