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UPDATE 1-Brazil's left shaken by prospects of Lula jail, markets rally

* Court decision increases chances for centrist in 2018 election

* Lula's Workers Party defiant in defending his right to run (Rewrites with political analysis, comments, market reaction)

BRASILIA, April 5 (Reuters) - A Brazilian Supreme Court decision that cleared the way for convicted former president Luiz Inacio Lula da Silva's imprisonment plunged the left into disarray and increased the chances a centrist will win the October election, analysts and political foes said on Thursday.

Brazilian financial markets rallied on the Supreme Court ruling early Thursday to reject Lula's plea to remain free until he exhausts all his appeals of a corruption conviction. The decision likely ends his political career and any chances he has of running for president, despite opinion polls showing he is the front-runner.

A defiant Workers Party, founded by Lula, said its supporters would take to the streets to defend his right to run. A candidate is forbidden by law from running for elected office for eight years if convicted of a crime.

"Lula continues to be our candidate, because he is innocent, and because he is the leading candidate to become the next president of Brazil," said Workers Party leader, Senator Gleisi Hoffmann.

But political rivals and analysts said there was little hope of a comeback by Lula, who faces six more trials on various graft charges.

"There is no way Lula can rebuild his career. He dug his own political grave by leading a complex corruption scheme," said Senator Alvaro Dias, the presidential candidate for the centrist Podemos party. "It is the end of a populist cycle in Brazil."

Lula's downfall is a serious loss for Brazil's already divided left because he is still the country's most popular politician despite the corruption scandals.

Supporters camped out around the home of Brazil's first working-class president in metropolitan Sao Paulo while his closest allies huddled to rethink political strategy.

"The Workers Party will have to move quickly to Plan B, which is former Sao Paulo mayor Fernando Haddad, or even Plan C to back a leftist from another party like former Ceará state governor Ciro Gomes," said Lucas de Aragao, a political analyst with Arko Advice in Brasilia.

Even if he is behind bars, Lula can influence the election campaign by endorsing another candidate, but the damage to his reputation has greatly diminished his clout.

Lula served two four-year terms as president from 2003 to January 2011 and left office with an approval rating higher than 80 percent. His endorsement was enough to get his hand-picked successor Dilma Rousseff elected twice, despite her never having held an elected office. Rousseff was impeached and removed from office in a corruption scandal and economic crisis in mid-2016.

Today, his backing would not be enough to enable a candidate to reach a second-round vote, Aragao said.

Opinion polls show that Gomes and environmentalist Marina Silva would gain the most from Lula not running in October. Extreme-right candidate Jair Bolsonaro, who is polling in second place, stands to lose with Lula gone, as his anti-left rhetoric would be without its main punching bag.

Disarray on the left will improve the chances for a centrist such as Geraldo Alckmin, governor of Sao Paulo, Brazil's richest state, and candidate for the powerful Brazilian Social Democracy Party. Center-right President Michel Temer has record unpopularity in opinion polls.

Lula's lawyers, who call the case against him a political witch hunt to stop him returning to power, have few legal maneuvers left in the lower appeals court where he was sentenced for taking bribes in Brazil's biggest corruption scandal. He could go to jail within a week.

The Workers Party has refused to openly discuss an alternative to nominating Lula to run.

"Sticking with Lula will just hurt the Workers Party and the left as a whole because other candidates cannot emerge," said Claudio Couto, a political science professor at the FGV think tank in Sao Paulo.

Couto cannot see the once-powerful Workers Party having a competitive candidate until it makes a public apology for getting caught up in the systemic corruption among Brazil's traditional political class.

An appeals court in January upheld Lula's conviction for taking bribes from an engineering firm in return for help landing contracts with state-run oil company Petroleo Brasileiro SA. The court increased his sentence to 12 years.

(Reporting by Anthony Boadle; editing by Grant McCool)