By Michelle Kambas

The UN mediator on Cyprus, seeking to end a four-decade diplomatic deadlock, said Greek and Turkish sides now had strong economic reasons to agree a reunification that could help ease debt problems and speed exploitation of disputed gas fields.

"Both Greek Cypriots and Turkish Cypriots have economic difficulties,» Alexander Downer, special advisor on Cyprus to

U.N. Secretary-General Ban Ki-moon, said.

"It is a good opportunity to remind people that a solution to the Cyprus problem will be economically very beneficial and

it will certainly be well received by the international community,» he told Reuters in an interview.

Greek Cypriots representing Cyprus internationally were forced to seek aid from the International Monetary Fund and the

European Union in June to prop up their banks, badly exposed to debt-crippled Greece.

Turkish Cypriots living north of a buffer zone splitting the island's two main populations are economically and politically

isolated, relying on financial handouts from Ankara.

Cyprus was split in a 1974 Turkish military invasion triggered by a brief Greek Cypriot coup instigated by the military then ruling Greece.

The conflict has come into sharper focus with natural gas discoveries in the eastern Mediterranean. Greek Cypriots

reported their first major discovery in December 2011, while Turkey launched an on-shore drill in northern Cyprus in April

Cyprus, an EU member now holding the rotating presidency of the bloc, has, like every other EU country, veto rights over

Turkey's bid to join the EU.

"It's peaceful, but everyone knows this is temporary, and everyone knows there needs to be a solution which is permanent,» said Downer, whose office is in a sprawling U.N. compound which was once Nicosia's international airport, scene of some of the fiercest fighting in 1974.

The bullet-riddled shell of a Cyprus Airways aircraft squats on a runway overgrown with weeds, testament to the violence.

"It (reunification) would reduce the sovereign risk of investing in Cyprus, clear up the problems of investing in

property, grow GDP and offer capacity to service and pay off debt,» Downer said.

"It would be an economic boon to Cyprus just when it needs one. There's gas, but that is years off until that is sold."

Four years ago, the United Nations launched a new round of talks, the latest of many peace efforts. Downer is still

cautiously optimistic about cracking a deal and succeeding where dozens before him failed.

"It is hard,» said Downer, a former Australian foreign minister. «There have been efforts made for 38 years to solve

the Cyprus problem. A lot has been achieved, there are a lot of convergences, there is a basic plan, but the deal hasn't been done."

Greek and Turkish Cypriots agree in principle on reuniting the island as a federation, but differ on how it would work.

Differences remain on core issues ranging from how Cyprus is to be co-governed to property claims from thousands of internally displaced people.

Direct talks between the leaders of the Greek and the Turkish Cypriots have been on hold for several months, partly

because of a Greek Cypriot poll in 2013 to elect a new president.

The United Nations has also backed off from plans to call a multilateral conference because of Greek Cypriot objections about the timing.

"The risk of failure and of total collapse was way too high, and it would have been reckless for us to have called a

multilateral conference, and that was the advice I gave the secretary-general,» Downer said.

Downer said the time between now and the election next February was focused on talks with technocrats between the two sides. «In terms of negotiations on the substantial issues, we will get them under way once a new president has been elected."

[Reuters]