* Calls for reducing poverty and endemic corruption
* Russia struggles with growing Islamist insurgency
(Recasts, adds comments, details)
By Darya Korsunskaya
KISLOVODSK, Russia, July 6 (Reuters) - Russian Prime Minister Vladimir Putin on Tuesday unveiled a new strategy aimed at foiling Islamist insurgency in the North Caucasus, promising to reduce grinding poverty and stamp out rampant corruption.
Russia is struggling to contain an upsurge of attacks by rebels in the mainly Muslim provinces along its southern flank who in March took their war to the Russian heartland with deadly bombings in the Moscow metro.
Local leaders say a potent mix of clan feuds, poverty, Islamism and heavy-handed tactics by law enforcement agencies has driven youths into the hands of rebels who want to create a Sharia-based pan-Caucasus state.
In a shift from a decade of uncompromising statements on the North Caucasus, Putin focused on social and economic policies, called for local leaders to listen more to human rights groups and even said he sometimes felt sympathy for the rebels.
"I sometimes even feel sorry for these people who are still running around in the woods there," Putin told members of his ruling party in Kislovodsk, a city just east of the mainly Muslim regions of the North Caucasus.
We need "to show that the state is in a condition to effectively guarantee the security and safety of investments in the North Caucasus, to defend them from criminals, the tyranny of officials and protection rackets," he said.
Putin, who in 1999 led Moscow into a war against Chechen separatists, is famous for sometimes crude comments on the rebels, promising to "rub them out in the outhouse" and later mocking a French reporter who grilled him on the second Chechen war with an invitation to undergo a circumcision in Russia.
But during several hours of questions after his speech, Putin said he hoped the rebels would return to normal life.
President Dmitry Medvedev said in November that strife in the North Caucasus was Russia’s biggest single domestic problem, a step some analysts said was an implicit admission that Moscow’s approach needed to be changed.
Human rights activists say the Kremlin has relied for far too long on local leaders and security forces whose hard-handed tactics have exacerbated the insurgency.
Medvedev has demanded officials improve the economy of the North Caucasus, which was devastated by two wars against Chechen rebels since the 1991 fall of the Soviet Union.
"Any investor should be treated, in my view, as a member of the family," Putin said, adding that local leaders should focus on reducing unemployment which in Ingushetia runs at more than half of the able bodied population.
Putin, who is accused of cracking down on freedoms during his eight-year presidency from 2000 to 2008, said local leaders should talk more with human rights groups and warned elites remained far too distant from their populations.
"We need a permanent, productive dialogue with social and human rights organisations," Putin said, though he cautioned that many human rights organisations were funded from abroad.
"People in the North Caucasus are not able to even knock on the door of the official structures, they are unable to find support or even understanding, they come up against a wall of indifference, of passing the buck and bribery," he said.
When asked by a party activist what should be done to stop the corruption which she said eats up half of all the federal money sent to the North Caucasus, Putin quipped: "hang them". (Writing by Guy Faulconbridge and Alexei Anishchuk, editing by Ralph Boulton)