* Government says reform needed to protect privacy
* Critics say law will damage freedom of expression
* EU says Turks deserve more transparency, not less
* Rules could deter foreign investment
Turkey's parliament has approved internet controls enabling web pages to be blocked within hours in what the opposition decried as part of a government bid to stifle a corruption scandal with methods more suited to "times of coups".
Social media and video sharing sites have been awash with alleged recordings of ministers including Prime Minister Tayyip Erdogan and business allies presented as proof of wrongdoing. Reuters has been unable to verify their authenticity.
Under a bill passed late on Wednesday, telecommunications authorities can block access to material within four hours without a prior court order, tightening restrictions imposed in a widely criticised law adopted by the EU candidate in 2007.
"This is against the constitution. Bans like this exist in times of coups and have not been able to conceal any corruption," Umut Oran, a deputy from the main opposition CHP, told the general assembly.
Erdogan's critics say his response to the corruption scandal is further evidence of the authoritarian tendencies of a man long held up by the West as a potential model of democratic leadership in the Muslim world. It has raised concerns about stability in the run-up to local and presidential elections this year, helping drive the already fragile lira to record lows.
Communications Minister Lutfu Elvan said criticism of the new law, including from the European Union, was based on misinformation and that it aimed to enable authorities to block specific content rather than impose blanket website bans.
"In many European countries (the laws) are much harsher ... none of the criticism bears any relation to reality," he said.
The internet legislation, which still needs the approval of President Abdullah Gul, will allow the storage of individuals' browsing histories for up to two years.
Nils Muiznieks, commissioner for human rights at the Council of Europe, said the amendments went in the "opposite direction" to European standards on freedom of expression and of the media.
"The hasty and opaque manner in which these amendments have been pushed through parliament, without any genuine consultation of the major stakeholders, is also regrettable."
The graft scandal erupted on Dec. 17 with the arrest of businessmen close to Erdogan and three ministers' sons, and has grown into one of the biggest threats to his 11-year rule.
Erdogan has portrayed the scandal as an attempt by a U.S.-based cleric with influence in the police and judiciary to unseat him and has responded by reassigning thousands of officers and more than 200 prosecutors in a purge. The cleric, Fethullah Gulen, denies the accusation.
The government says the internet reforms, sent to parliament before Dec. 17 but broadened in recent weeks, are aimed at protecting individual privacy not gagging its critics.
Turkey already has strict Internet laws under which thousands of websites have been blocked, from news portals viewed as close to Kurdish militants to gay dating sites.
More than 40,000 sites are blocked, according to Turkey's engelliweb.com, which tracks access restrictions. Almost all internet traffic passes through the infrastructure of Turk Telekom, which is 32 percent state-owned and used to count new Interior Minister Efkan Ala among its board members.
Turk Telekom declined to comment on the new law.
Jim Cowie, chief technology officer and founder of Renesys, a U.S.-based firm that carries out real-time analysis of internet routes and traffic and provides intelligence for network companies, said the move could hit investment.
"It takes them in the direction of Iran and China, countries where there's a strong degree of regulation. You can't provide services unless you retain your licence. That gives the government a large degree of control," he said.
"Istanbul is a very logical place to put data centres if you want to serve the whole...Middle East," he told Reuters. "But because of the problems the government has potentially created ... you're more likely to go to Budapest or Sofia."
The 2007 law prohibits insults to modern Turkey's founder Mustafa Kemal Ataturk as well as encouragement to suicide, sexual abuse of children, the supply of illegal drugs, promotion of prostitution, and unauthorised gambling.
Access to video sharing site YouTube was blocked between 2008 and 2010 because it hosted content viewed as insulting Ataturk, who founded the modern secular republic in 1923.
Under the new law, decisions to remove material taken by the telecoms authority (TIB) will be subject to judicial review. A court will rule within 24 hours. TIB can appeal.
"This proposal ... gives the powers of the legislative, executive and judiciary completely to the TIB, which is turning into an intelligence agency," professors from Istanbul's Bilgi University and Ankara University said this week.
"From the perspective of fundamental rights and freedoms it indicates the start of a period of great darkness," professors Yaman Akdeniz and Kerem Altiparmak wrote.