* Three-decade conflict has scarred Turkey
* Ceasefire expected to mark Kurdish new year
* Cautious optimism in southeastern city
Jailed Kurdish militant leader Abdullah Ocalan is set to call on his fighters to halt hostilities with Turkey on Thursday in a peace process which marks the best hope yet of ending a conflict that has killed 40,000 and handicapped the country for decades.
In the mainly Kurdish southeastern city of Diyarbakir, hundreds of thousands will gather at Newroz celebrations marking the Kurdish new year to hear what Ocalan has said will be a "historic call".
His announcement will follow months of talks with Turkish intelligence officers and Kurdish politicians on the island prison in the Marmara Sea where he has been held since his capture by Turkish special forces in Kenya in 1999.
"The people here will listen to whatever Abdullah Ocalan says," said Ensari Bingol, 42, tugging at his worry beads outside Diyarbakir's 11th-century Great Mosque.
"It feels like a new day is dawning. This process is the best chance yet for peace ... But if it fails, things will get much worse than they were before."
Ocalan's statement could cement peace talks with Turkey that have been edging forward since October, possibly commanding his Kurdistan Workers Party (PKK) guerrillas to withdraw to northern Iraq where most of its several thousand rebels are based.
Such moves would lift a huge burden off European Union candidate Turkey, fighting the PKK since 1984 in a war which has drained state coffers, stunted development of the mainly Kurdish southeast and scarred its human rights record.
A settlement would bolster the NATO member's credibility as it seeks to grow its influence across the Middle East, and remove a stumbling block in its ailing EU accession process.
Truces have been declared and secret talks held with the PKK in the past, but expectations this time have been fuelled by the openness with which the process has been conducted.
If the ceasefire holds, the path to disarmament and the reintegration of militants will still be long and vulnerable to sabotage.
Leftist militants launched bomb and missile strikes on Turkish government and ruling party offices on Tuesday night in attacks which Prime Minister Tayyip Erdogan said were aimed at derailing the peace process.
"Peace won't come just because the prime minister says so. A ceasefire isn't enough to guarantee my rights and freedoms," said Mustafa Guner, 22, a literature student at nearby Dicle University, sipping tea at a cafe in a restored caravanserai.
"I am hopeful, but I am also wary and I am anxious."
FRAGILE ROAD AHEAD
Talks with the PKK, considered a terrorist group by the United States and the European Union as well as Turkey, were long unthinkable to most Turks. But Erdogan has promoted the contact since a worsening of the conflict brought rising guerrilla violence and large-scale arrests of Kurdish activists.
Growing Kurdish assertiveness in neighbouring northern Iraq's autonomous Kurdistan region and in war-torn Syria have only added to the sense of urgency.
Guner's classmate Resan Erdogan, 25, said a PKK withdrawal too early in the peace process could be disastrous for Kurds.
"The PKK is our insurance. Any rights we have gained are because they fought for them," he said as the sound of fighter jets from the city's air base thundered above, a reminder of the heavy military presence Turkey maintains in the region.
Abdullah Demirbas, a district mayor in Diyarbakir, said there were likely to be more attempts to sabotage the process ahead.
"There are deep forces who want war and they are pervasive. They feed off blood," he told Reuters.
"The PKK, Ocalan and the government must be brave... There is massive social support for this process. There is hope, albeit restrained. That stems from disappointments in the past."
Demirbas said this was a last chance for peace.
"The next generation is like a storm. It is more radical. It has never known peace between Kurds and Turks. Now you can still convince many of them, we can still win them over. But if we lose them this time, they will never listen to us again."