* Libya losing $130 million a day in lost oil revenues

* Oil exports form lion's share of Libyan income

* Libya has FX reserves of more than $100 billion

By Marie-Louise Gumuchian

LONDON, Sept 18 (Reuters) - Libya could start dipping into financial reserves from next month if prolonged protests crippling the oil sector are not resolved, Finance Minister Alkilani Abdelkarim al-Jazi said.

The North African OPEC member is losing some $130 million a day due to a combination of strikes and the blocking by militias and political activists since July of most of Libya's oilfields and ports. The government's fledging army and police force are ill-equipped to deal with armed protesters.

Oil revenues form the lion's share of Libya's income. A prolonged drop in output could be disastrous for state finances already strained by spending on subsidies and salaries, including for tens of thousands of former rebel fighters from the 2011 civil war that ousted dictator Muammar Gaddafi.

"The strikes started in mid-July ... so we are starting to feel that the cash flow is short," Jazi told Reuters on the sidelines of the FDI Libya conference in London on Wednesday.

"If we are talking about the rest of 2013, we expect that probably by the end of October we will need to use other sources beside the budget, beside the government accounts."

He said delayed oil sales had helped boost state revenues in the first half of 2013 but did not give any figures.

Libya's budget for 2013 is 67 billion dinars ($54 billion), to be financed largely by oil exports, which at pre-war oil output levels of around 1.6 million barrels per day (bpd), reached earlier this year, were bringing in $4 billion a month.

The country has more than $100 billion in foreign reserves and its sovereign wealth fund has assets of $60 billion, comprising shares, bonds, financial products and holdings in subsidiaries.

Asked where the government would draw money from first, Jazi said: "First to the surplus in unused balances (of government spending). "It's enough for the rest of the year ... We have reserves, we have other accounts aside, we have balances in many government agencies - unused cash balances."

Tripoli has restarted some southwestern oilfields but the bulk of oil production in the east is still paralysed.

"The picture has improved," Jazi said, adding it took an average 45 days to reap payment for oil shipments.

"We are working on a cash-flow basis."

Not all officials believe drawing on Libya's substantial reserves is the way forward. The central bank governor told Reuters on Monday that he opposed suggestions that the government could draw on Libya's foreign exchange reserves or cash deposits in its sovereign wealth fund.

He also said Libya's economy could grow just 5 percent instead of around 18 percent predicted by the International Monetary Fund this year if the country cannot end the protests.

"We don't have a cash issue. Even if production doesn't ramp up, it's not like we will be going bankrupt," Mohammed Ali Abdallah, a Libyan lawmaker and member of the national assembly's budget committee, told Reuters on Wednesday.

"At the same time, it's not fiscally responsible to be planning towards dipping into these reserves that are intended for sustaining future generations."

Abdallah said Libya could run a budget deficit if it dipped below a year-to-date average oil output of 1 million bpd.

"If we are able to maintain it above that as a year-to-date average, we should be OK for 2013 but it generates a risk for financing the 2014 budget," he said. "The longer you're out of the market you lose credibility with clients as a supplier."

Also visiting London, Prime Minister Ali Zeidan on Monday appealed for international help to restore security in the country awash with weapons.

"There is a lot of positive response and willingness to help especially around training, arms collection," Abdallah said of the plea. "However there is a lot of delay ... there are issues on our side," he said, adding that Libya's newly-appointed army chief and defence minister were only settling into their jobs.

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