* Legal obstacles prevent release to rebels of frozen funds
* Anti-Gaddafi nations set up fund for rebel administration
TRIPOLI, May 5 (Reuters) - The Libyan government rejected on Thursday U.S. plans to unblock its frozen assets and give them to rebels fighting Muammar Gaddafi, saying such a move was piracy and would undermine the global financial system.
U.S. Secretary of State Hillary Clinton told anti-Gaddafi countries meeting in Rome that Washington would try to pass legislation to unblock frozen Libyan assets and hand them to the rebels who have seized eastern Libya.
Washington has frozen about $30 billion in such assets since the Libyan revolt began in February, but there are legal obstacles to enabling the money to be used.
“Any use of the frozen assets is like piracy on the high seas,” said Libya Deputy Foreign Minister Khaled Kaim.
“They (the rebels) are not a legal entity. They are not a country. The country is not divided according to a referendum or to a United Nations resolution,” he told journalists. “This is illegal ... If we stay silent about it, I think we will be living in a jungle.”
Kaim said handing Libyan assets to the rebels would discourage wealthy countries from investing abroad, for fear their cash would be seized and handed to rebel groups at the first sign of domestic unrest.
He said that Libya had more than $140 billion invested abroad and that the Libyan central bank had transferred 700 million Libyan dinars ($571 million) to its Benghazi branch in February to pay for six months of salaries and other expenses. He condemned pledges by Western and Arab countries opposed to Libyan leader Gaddafi to set up a fund to help the rebels, who are desperately short of cash, saying the mechanism was illegal and there was no way to monitor the way the money was spent.
“Where was the 700 million spent?” he said. “On arming rebels or dividing among the nine people on the self-appointed council?” (Reporting by Lin Noueihed, editing by Tim Pearce) ($1=1.226 Libyan Dinar)