* Release could indicate new thinking in Cuban government
* Havana's move sends positive signal to U.S., Europe
* Economic needs seen tied to prisoners' release
By Jeff Franks
HAVANA, July 12 (Reuters) - The Cuban government's surprising decision to free 52 political prisoners enables President Raul Castro to reduce political friction both inside and outside Cuba, and focus on pulling the island out of financial crisis, Cubans and Cuba experts said.
They said Castro appeared to be moving to put aside an issue that has long damaged Cuba's international image, trade and diplomatic relations to the detriment of its economy.
"I think the prisoners are being released for a combination of reasons, but all related to the need for tourism, trade and investment to alleviate the economic catastrophe that Cuba is sliding into," Miami-based attorney Timothy Ashby told Reuters.
"The prisoners, especially the hunger strikers, are an international embarrassment and complicate relations with trading partners," said Ashby, formerly a U.S. Commerce Department official in charge of trade with Cuba and the Caribbean.
The immediate goals, he said, may be to send a positive signal to the United States and Europe, where key decisions affecting Cuba could be made in coming months.
Cuba wants the U.S. Congress to pass a pending bill that would end a longstanding ban on Americans traveling to the island -- part of a 48-year-old U.S. trade embargo -- which could bring a flood of U.S. tourists and much needed revenues to the cash-strapped island.
Recent visiting U.S. trade delegations said Cuban officials had urged them to go back and lobby for the bill's passage.
Castro has sought improved relations with the European Union and pushed for the group to amend its common position, which ties full economic cooperation to the release of political prisoners and improved human rights.
His hopes for a change earlier this year, when Spain led the 27-nation bloc, were dashed by human rights controversies, but the EU is to revisit the issue in September.
STRUGGLING CUBAN ECONOMY
Castro "surely knows that a substantial prisoner release is likely to draw a reaction from Washington and Europe, as it should," said Phil Peters, a Cuba expert at the Lexington Institute think tank in Arlington, Virginia.
The Cuban leader, who succeeded his older brother Fidel Castro as president in 2008, has his hands full trying to modernize Cuba's economy, battered by damaging hurricanes, the global financial crisis and chronic inefficiencies.
He has taken small steps toward economic reform and there have been hints of larger ones to come.
But since Feb. 23, when imprisoned dissident Orlando Zapata Tamayo died in a hunger strike seeking better jail conditions, Cuba has been widely condemned for its human rights record.
Zapata's death was followed immediately by a long, life-threatening hunger strike by dissident Guillermo Farinas. Government-directed harassment of the dissident "Ladies in White" group during March and April marches by the women also added to the international criticism of Cuban authorities.
Both Farinas and the Ladies in White were demanding the release of prisoners included in the 52 to be freed.
The prisoner release has, for now, quieted foreign critics and may help Castro focus on economic improvement, said Anya Landau French, a Cuba expert at the New America Foundation think tank in Washington.
"Why is Raul doing this? It could be because of internal or external backlash, or to get a distraction off their plate while they focus on the economy," she said.
REACTION AGAINST STAGNATION
Farinas ended his hunger strike the day after the releases were announced. Ladies in White leader Laura Pollan said on Sunday the group will continue its weekly protest marches until Cuba frees all of its estimated 167 political prisoners.
But the group's central issue was the release of the 52, their sons and husbands arrested in a 2003 crackdown.
Cuba wants to send the freed prisoners and their families to Spain, and so far most have accepted the offer. That means many of the Ladies in White may soon be gone.
Dissident Miriam Leiva said freeing the prisoners both "resolves a great injustice" and reduces an issue "that has stood in the way of any type of internal or external opening."
"The Cuban people have a lot of opinions ... and I think even in the goverment that this society cannot continue to be stagnant," she said.
Ashby said the release indicated that new blood was beginning to assert itself in the Cuban leadership.
It "signals a broader change in the sense that the younger, business-oriented generation of Cubans in positions of government leadership are uncomfortable with archaic repression and the commercial complications it creates," he said.
But it remained to be seen, experts said, how the United States will respond to the prisoner release.
Washington has demanded the freeing of political prisoners as a condition for improved relations, but may not be in a mood for major change due to the detention in December of U.S. contractor Alan Gross in Cuba on suspicion of espionage.
U.S. officials and his employers have said he was not a spy but was in Cuba facilitating Internet access to Jewish groups.
"I don't know if this (U.S.) administration, timid and not very active so far regarding Cuba, will respond," Peters said. (Reporting by Jeff Franks; Editing by Pascal Fletcher and Todd Eastham)