By Simon Bahceli

NICOSIA (Reuters) - A presidential election in a sliver of Cyprus on Sunday will have ramifications far beyond the territory's boundaries, from the island's fragile peace process to Turkey's bid to join the European Union.

Barring a last-minute upset, hardline right-winger Dervis Eroglu is set to sweep to victory in northern Cyprus, a territory recognized as a republic only by Ankara.

A staunch believer in independence from the rest of Cyprus, Eroglu has staked his claim to the presidency by accusing incumbent Mehmet Ali Talat of failing in talks with Greek Cypriots aimed at resolving their territorial dispute.

The Greek side, which controls two-thirds of the island, wants reunification; Eroglu supports a two-state confederation.

The independence calls are a red flag for Greek Cypriots, who represent Cyprus in the EU and will block Turkey joining the grouping until the conflict is resolved.

Polls of the 164,000 voters in northern Cyprus give Eroglu a large margin for victory, and some even point to him winning the vote in the first round.

For many diplomats and analysts, the 72-year-old doctor has few redeeming political qualities.

"If Eroglu wins, prospects of a settlement are significantly weakened, if not completely destroyed," said a diplomat in Nicosia, Cyprus's capital.

"Without a deal, it would remove chances of Turkey's EU accession any time soon."

Ethnically split since a 1974 Turkish invasion sparked by a short-lived Greek-inspired coup, Cyprus was a diplomat's nightmare even before it joined the EU in 2004.

TURKEY'S EU MEMBERSHIP BID AT RISK

Nominally, the entire island is in the EU, though effective membership is confined to the southern Greek Cypriot side, whose authority stops at a ceasefire line controlled by U.N. peacekeepers.

Turkey started EU entry talks in 2005, but Cyprus has repeatedly used its position in the EU to block the opening of chapters, or areas to negotiate to ensure policies meet EU standards, as a pressure tactic on Ankara.

Turkey is also under EU pressure to open its ports and airports to Greek Cypriot traffic, which it has so far failed to do.

"If the talks run to the ground it will have repercussions on Turkey's EU accession course. We all know a solution to Cyprus's problem is a prerequisite to Ankara's accession," said Hubert Faustmann, associate professor of history and politics at the University of Nicosia.

Turks and Turkish Cypriots have expressed frustration that Turkey's membership bid is so strongly connected to the dispute.

Eroglu has said he will continue peace talks with Greek Cypriots if he wins.

"It's unthinkable that the negotiations will grind to a complete halt," said Amanda Paul from the European Policy Center in Brussels. "The negotiation process will continue but ... actual progress will be limited."

The talks could turn into a waiting game to see which side will blink first if Eroglu introduces his publicly expressed position for a two-state deal instead of the bi-zonal bi-communal federation Turkish Cypriots have advocated up to now.

Greek Cypriot leader Demetris Christofias and Talat, a fellow leftist, have covered about half of the areas of negotiation in the peace talks launched in 2008.

"Eroglu will present the perfect pretext for our confused comrade (Christofias) to leave the negotiating table and blame the Turkish side and Turkey," said Ahmet Sozen of the Turkish Cypriot Cyprus Policy Center.

Sozen attributed Eroglu's popularity to the feeling among Turkish Cypriots that they were let down by the international community by being kept in isolation even after they voted in favor of a U.N. unification blueprint in 2004 rejected by Greek Cypriots.

"This could take us back to 2002 when the international community was putting all the blame on the Turkish side," Sozen said.

(Additional reporting by Justyna Pawlak in Brussels, Writing by Michele Kambas; Editing by Sonya Hepinstall)