Azerbaijan"s leader set to keep power but problems loom

* Baku's luxury heart shows gap between rich and poor

* President Aliyev set to win third five-year term

* Economic growth slowing since oil boom in 2003-07

* Rights groups accuse Aliyev of violations

By Margarita Antidze

BAKU, Oct 4 (Reuters) - Luxury cars cruise down "Oilman Avenue" past five-star hotels and exclusive boutiques in the capital of Azerbaijan, where President Ilham Aliyev looks sure to be re-elected on Wednesday.

While residents of cramped apartments in drab Soviet-era blocks on the outskirts of Baku, may feel excluded from the oil boom that has transformed smarter parts of town, opponents of Aliyev, 51, say controls on dissent mean they have little chance of stopping him winning a third five-year term.

That will extend a dynastic rule under which he and his father, former Communist leader Heydar Aliyev, have ruled the mainly Muslim state since 1969, except for a period from 1982 to 1993. Opinion polls show him clearly in the lead.

Located between Iran and Russia, Azerbaijan is a vital energy supplier to Europe and a transit route for U.S. troops in Afghanistan. Critics say this has made the West turn a blind eye to shrinking freedoms since Aliyev came to power in 2003.

A new generation of Internet users, inspired by the "Arab Spring" uprisings, sees no chance of ousting Aliyev next week, but problems are growing that they hope he will have to address in his next term - and might one day unseat him.

As oil output peaks, discontent is growing over the gap between rich and poor and tensions are rising with neighbouring Armenia in a territorial dispute that caused a war in the 1990s.

"I don't believe change will come to this country through the election as there is no real election in Azerbaijan," said Adnan Hajizade, a 30-year-old blogger who fell foul of the authorities, sipping ginger tea in a busy Baku cafe.

"This government is at the peak of its strength right now but if a big social catastrophe happens, whether it's a war or the country runs out of natural resources, it will be a serious problem for them."

Hajizade and fellow blogger Emin Milli were arrested over an alleged brawl in a Baku restaurant. Supporters say they were victims of an unprovoked attack and were jailed as a warning to others after Hajizade held a fake news conference dressed as a donkey to poke fun at the authorities.

"I do like to believe that we inspired others," he said.

Protests after Aliyev secured nearly 90 percent of the votes in the 2008 election were quickly ended.

But opposition rallies have increased in the past three years, despite the threat of arrest by police who usually quash protests quickly, and thousands demanded Aliyev's resignation at a rally in Baku last month.

"MY PRESIDENT"

Dozens of Aliyev's opponents have been arrested this year, more than doubling the number of political prisoners to 142, the Azerbaijan-based Human Rights Club said. Authorities have also raised fines on protesters who attend unsanctioned rallies.

Newspaper editor Khilal Mamedov, arrested in June 2012, was sentenced to five years in jail this month for treason, drug possession and "fomenting national strife" in a case his lawyers called "absurd".

Although the opposition has united for the first time behind a single candidate, Jamil Hasanly, he poses no threat to Aliyev.

During a televised election debate with other candidates - the majority of them pro-government - someone in the audience threw a bottle at the 61-year-old historian. It missed.

"There are a lot of young people who honestly support Aliyev," said Shahin Seyid-zade, head of the pro-government National Youth Council who organised a campaign called "My president".

"The opposition has failed to come up with a leader who can seriously challenge President Aliyev ... People see no alternative to him."

Aliyev's time in office has coincided with an increase in per capita GDP to $7,850 in 2012 from $850 in 2003.

When he took power, Azerbaijan was still reeling from the economic chaos of the 1990s and a war over Nagorno-Karabakh, a mountainous territory in Azerbaijan which is controlled by ethnic Armenians, in which about 30,000 people died.

BARONS

The 190-m (620-ft) Flame Towers skyscraper looming over Baku is testament to the oil boom, a century after the first oil barons struck rich on the shores of the Caspian Sea and built mansions and opera houses copied from Europe.

But economic growth has slowed since 2003-2007 when the economy expanded by an average 21 percent per year.

The main reason is a slowdown in oil production, raising concerns and prompting Aliyev to accuse operator BP of making "false promises".

The economy grew by 5.2 percent year-on-year in January-August compared to 1.3 percent in the same period last year, accelerating thanks to double-digit growth outside the oil sector, which accounts for about 70 percent of state revenues.

Azerbaijan signed contracts last month to supply Europe with gas from its giant Shah Deniz field, due to come on line in several years, offering an alternative supply source to Russia.

"We won't run out of oil in a day and there are also prospects for gas production as well as other projects," said Elnur Aslanov, head of the political analysis and information department in the presidential administration.

"We are not afraid of the opposition... There are challenges and we are addressing them." (Editing by Timothy Heritage and Robin Pomeroy)