By Adrian Croft - Analysis

LONDON (Reuters) - Conservative leader David Cameron performed a balancing act in a speech on Wednesday, trying to be tough enough to placate party members hostile to the European Union without alarming continental partners.

Cameron's Conservatives are strong favourites to return to power after a dozen years in opposition in an election that must be held by next June.

EUROSCEPTIC ANGER

The Conservative leadership angered hardline Eurosceptics in the party, implacably opposed to what they see as the march towards a European super-state, on Tuesday by dropping a pledge to hold a referendum on the European Union's Lisbon treaty.

Party leaders say the referendum promise is no longer realistic after Czech President Vaclav Klaus became the last EU leader to sign the Lisbon treaty, which is designed to reform EU decision-making and make the bloc a force on the world stage.

WHAT CAMERON WANTS

Cameron said the Conservatives would seek the return of some powers, in the areas of social and employment rights and criminal justice, but indicated the party would be in no hurry to do so and said it could take four or five years.

He stressed that a Conservative government would be an active member of the 27-nation bloc and his goal was not to sabotage the EU.

A Conservative politician suggested that any changes the party negotiated might be written into the accession treaty for Croatia when it joins the EU, as it hopes to do in 2011 or 2012.

The Conservatives would try to amend British law so that any future transfer of power to the EU would have to be submitted to a referendum in Britain, Cameron said.

EUROPE A DILEMMA

Cameron is opposed to a federal Europe but wants Britain to remain within the EU, on which Britain depends for the lion's share of its trade.

Cameron has already irritated mainstream centre-right parties in Europe by backing the creation of a new anti-federalist bloc in the European Parliament.

He could further anger European power brokers such as German Chancellor Angela Merkel and French President Nicolas Sarkozy if he pushes aggressively for powers to be returned to London.

Also, the Conservatives are pro-American and analysts say Washington wants Britain to be at the heart of the EU to promote U.S. interests.

WHAT NEGOTIATING POWER DOES CAMERON HAVE IN EUROPE?

Cameron would have to win the support of the 26 other member states to repatriate powers to Britain. The EU is exhausted after years of institutional wrangling over Lisbon and will be reluctant to embark on thorny new negotiations.

Cameron could use the leverage of upcoming negotiations on the EU's 2014-20 budget to try to get his way.

The worst case scenario is that deadlock in those negotiations could force Britain into a situation where it becomes a question of staying in the EU or leaving altogether.

WILL THE NEW POLICY SATISFY EUROSCEPTICS?

Probably not. Eurosceptics in the party feel betrayed that Cameron has now scrapped his pledge to hold a referendum.

Some members of parliament are demanding that Cameron stick to his pledge to hold a referendum -- if not on Lisbon, then on Britain's relationship with the EU or on what powers should be included in negotiations between Britain and the EU.

WHAT ARE THE DANGERS OF ALIENATING EUROSCEPTICS?

Cameron would be horrified at a return to the feuding over the EU that nearly tore apart the last Conservative government under John Major in the early 1990s.

A serious split could lead to rebellions in parliamentary votes, weakening a Conservative government.

WHAT ARE THE ELECTORAL IMPLICATIONS?

The UK Independence Party, which wants Britain to withdraw from the Union, will hope to profit from Cameron's climbdown.

UKIP plans to target over 500 seats at the next national election. It will win few if any seats but may deprive the Conservatives of enough votes in marginal seats to allow Labour to cling on to them.

(Writing by Adrian Croft; editing by Tim Pearce)