BEIRUT (Reuters) - Hezbollah is set to achieve its long-held goal of winning the release of Lebanese prisoners held in Israel this week, emboldening the Iranian-backed group which has emerged even more powerful from recent conflicts.

Lebanon's Hezbollah leader Sayyed Hassan Nasrallah speaks through a giant screen during a news conference in Beirut suburbs July 2, 2008. REUTERS/ Issam Kobeisy

Two years after standing its ground in a 34-day war with Israel, Hezbollah has reinforced its military wing and routed its U.S.-backed adversaries in Lebanon -- defying the United States, which sees it as a terrorist group and proxy of Tehran.

Hezbollah is now seeking reconciliation with its Lebanese rivals, hoping to cool sectarian tensions inflamed by its May takeover of Beirut. Those enmities could pose a threat to both the Shi’ite group and Lebanon if left unhealed.

“Hezbollah, far from being weakened in the 2006 war or in the subsequent political battles in Beirut, is stronger than ever,” said Andrew Exum, a researcher on the group based at Kings College, London.

For Iran, the stature of a group established with the help of its Revolutionary Guards in 1982 is a great asset in its own confrontation with the United States and other powers over its nuclear ambitions and influence in the Middle East.

Hezbollah has replenished and expanded its arsenal since the 2006 war. Estimated to have received military and other aid worth several billion dollars from Iran, it is seen as one of the region’s toughest fighting forces despite the February assassination of its commander, Imad Moughniyah.

Hezbollah brought some of its military power to bear on the streets of Beirut in May when it briefly took over Muslim areas of the city, effectively imposing its terms for an end to 18 months of political conflict with the governing coalition.

“Hezbollah is now certain that its position is guaranteed by the (Lebanese) military and the government,” said Suleiman Taqieddin, a columnist with as-Safir newspaper, which is sympathetic to the opposition alliance led by Hezbollah.

A Qatari-mediated agreement after the street fighting met the main demands of Hezbollah and its allies -- a domestic triumph for a group which commands the loyalty of a majority of Lebanese Shi’ites, the country’s biggest single community.

But the Doha settlement sidestepped many issues at the heart of conflict in Lebanon, including the fate of Hezbollah’s arms. Having shaken off foreign and local pressure to disarm, nobody expects the group to give up its guns any time soon.

But with sectarian animosity at its worst since the 1975-90 civil war, Hezbollah’s military clout is also a threat to the group’s standing in the medium term, said Nabil Boumonsef, a columnist with the pro-governing coalition an-Nahar newspaper.

SEEKING RECONCILIATION

“In the same measure as Hezbollah is strengthened by its weapons, it is weakened internally because it inspires the fear of all. Weapons in Lebanon cause fear and will draw in more weapons,” he said.

Seeking to ease tensions, Hezbollah leader Sayyed Hassan Nasrallah has stressed the need for reconciliation with rivals, the most prominent of whom is Sunni politician Saad al-Hariri.

Nasrallah has tried to use the prisoner swap with Israel that is expected to take place on Wednesday as a platform for internal rapprochement, calling it “a national accomplishment”.

Hezbollah is to exchange two Israeli soldiers for five Lebanese said by Nasrallah to be the last held by Israel. The soldiers -- believed dead although Hezbollah has not said so -- were seized in a cross-border raid which sparked the 2006 war.

“This occasion is a unifying, national occasion,” Nasrallah has declared.

But full reconciliation needs the support of Hariri and his foreign backers, including Saudi Arabia. The Sunni-ruled kingdom, which has its own Shi’ite minority and is concerned about the spread of Iranian influence, may not see acquiescing in Lebanon’s new power balance as in its interest.

Even though a national unity government was formed last week after weeks of wrangling, sectarian tensions still smolder.

“Hezbollah’s early May actions inflamed the Sunni ‘street’ in Lebanon and contributed to a dramatic increase in sectarian tensions,” said U.S. Principal Deputy Director of National Intelligence Donald Kerr.

“Lebanon has seen an upswing of rearmament among all factions during the last year or more and the events of early May will no doubt increase this trend,” he said in a May 29 address to the Washington Institute for Near East Policy.

“The way ahead in Lebanon is uncertain.”