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UPDATE 1-S.African watchdog defends bid to weaken central bank inflation mandate

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* Central bank filed court challenge against mandate change

* Finance minister, parliament also oppose proposal

* Row over central bank has hit rand, government bonds (Recasts with watchdog's comments)

JOHANNESBURG, July 6 (Reuters) - South Africa's main public watchdog stood by its bid to force the central bank to target growth rather than inflation, dismissing a legal challenge that the move was unconstitutional.

The head of the Public Protector Busisiwe Mkhwebane, set off a political row last month when she said the South African Reserve Bank's mandate should focus on growth rather than inflation and the currency - rattling investors and the rand.

The central bank has filed a court challenge to quash the recommendation, which is also opposed by Finance Minister Malusi Gigaba and parliament.

The Public Protector's spokeswoman Cleopatra Mosana said Mkhwebane had filed a notice opposing the challenges to her recommendation.

"The Public Protector is empowered, by the constitution, to take appropriate remedial action with regard to any improper conduct in the state affairs or conduct, or conduct in the state affairs which may result in any impropriety or prejudice," Mosana said.

Gigaba and opponents of the proposal say Mkhwebane was exceeding her mandate in making the recommendation. Critics say that Mkhwebane's role is to confront maladministration, not make central bank policy.

Analysts say it is unclear what prompted Mkhwebane's recommendation and that it would be up to the courts to decide whether her mandate extends to the central bank.

The row over the central bank has highlighted divisions in the tripartite political alliance of the ruling ANC, the country's biggest union, Cosatu, and the South African Communist Party (SACP) over the role of the reserve bank.

Both the ANC and the SACP are opposed to altering the mandate the central bank. Cosatu, however, has backed calls for changes saying the bank is not acting in the interests of South Africa's poor majority.

Investors were further unsettled this week after the ruling African National Congress proposed at its policy conference to nationalise the reserve bank.

Ratings agencies have warned that South Africa risked further downgrades if the independence of institutions such as the central bank was undermined. A cabinet reshuffle in March saw a respected finance minister fired, leading to South Africa credit rating being downgraded to "junk" by S&P Global ratings and Fitch.

Central bank's deputy governor Kuben Naidoo on Thursday acknowledged that inflation targeting was imperfect but said it was the best policy for now.

"Inflation targeting has its flaws but I think it's the least bad option for South Africa in the present environment given our economic circumstances," Naidoo told a public lecture.

Deputy Finance Minister Sfiso Buthelezi said last week there was a need to debate whether the central bank's inflation targeting range of 3 to 6 percent was still appropriate, as the country battles with its first recession in eight years.

"Perhaps it's a good (inflation targeting) band, but we set this 3 to 6 percent under different economic conditions, is it still relevant now? Is it a policy for all seasons?" Buthelezi said.

South Africa's headline consumer inflation rose slightly more than expected to 5.4 percent year-on-year in May from 5.3 percent in April, data showed.

The rand held near seven-week lows on Thursday, while government bonds also weakened. (Editing by James Macharia and Jon Boyle)