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UPDATE 2-Kuwait PM declines reappointment, emir removes senior ministers

(Adds context, detail on policy)

KUWAIT/DUBAI, Nov 18 (Reuters) - Kuwait's caretaker prime minister Sheikh Jaber al-Mubarak declined to be reappointed as premier in the OPEC oil producer on Monday, rebuffing the offer from the ruling emir after submitting the government's resignation last week.

The cabinet resignation came after lawmakers sought a no-confidence vote against the interior minister over alleged abuse of power and as a feud emerged between senior members of the ruling family, including the interior and defence ministers, over alleged mishandling of military funds.

Kuwait's Emir Sheikh Sabah al-Ahmad al-Sabah, 90, earlier on Monday removed his son, Defence Minister Sheikh Nasser Sabah al-Ahmad al-Sabah, and Interior Minister Sheikh Khalid al-Jarrah al-Sabah from their posts in the current caretaker cabinet, state news agency KUNA reported.

Oil policy, which is set by a supreme petroleum council, and foreign policy steered by the emir, are unlikely to change under a new government in the U.S.-allied state. The emir, who will still have to select a prime minister, is due to make a televised address later on Monday.

The feud had spilled very publicly onto social media over the weekend. The corruption allegations had led to public protests in Kuwait outside parliament this month and widespread criticism on social media.

Kuwait has the most open political system in the six-nation Gulf Cooperation Council, with a parliament that has the power to pass legislation and question ministers. Parliamentary elections are due next year.

Power struggles between senior ruling family members have often played out in parliament. Cabinet resignations happen frequently when elected lawmakers are set to question or submit a no-confidence vote against senior government officials.

The emir sought to reappoint Sheikh Jaber as premier, a post he has held since 2011, and asked him to form a new cabinet.

"I decline this appointment and ask that you accept that," Sheikh Jaber said in a letter to the emir, citing media campaigns against him in the feud. It was carried by KUNA.

The defence minister had issued a statement two days after the government resignation, saying the cabinet had stood down to avoid addressing mismanagement of some 240 million dinars ($790 million) in military funds before he assumed office. He said the defence ministry had submitted the case to the public prosecutor.

The interior minister has rejected lawmakers' charges against him. ($1 = 0.3036 Kuwaiti dinars) (Reporting by Aziz El Yaakoubi and Sylvia Westall in Dubai, Ahmed Hagagy in Kuwait; Editing by Ghaida Ghantous and Toby Chopra)