* Kem Sokha arrested over two years ago

* Fellow opposition figure flew into Malaysia on Saturday

* European Union considers whether to cut trade preferences (Adds comments from Kem Sokha, U.S. embassy, Human Rights Watch)

By Prak Chan Thul

PHNOM PENH, Nov 10 (Reuters) - Cambodia freed opposition leader Kem Sokha from house arrest on Sunday, more than two years after he was arrested and charged with treason, but the charges remain and he is banned from politics and from leaving the country.

Pressure has been growing on Hun Sen, Cambodia's authoritarian ruler of more than three decades, to ease a crackdown on his opponents as the European Union considers whether to go ahead with cutting preferential trade terms.

"As an innocent person who has been jailed for two years, I continue to demand that the charges against me be dropped," Kem Sokha said in a Facebook post.

"I expect today's decision to be the first step, but I, as well as many other Cambodians who have lost political freedom, still need real solutions and justice."

Kem Sokha, 66, was arrested in 2017 and the Cambodia National Rescue Party (CNRP) was banned in the run-up to last year's general election that Hun Sen's ruling party then swept but which was condemned as a farce by Western countries.

Kem Sokha was accused of plotting with foreigners to oust Hun Sen - a charge he dismissed as nonsense.

The Phnom Penh Municipal Court said in a statement that Kem Sokha could leave his house, but that he could not engage in political activity or leave the country.

"This is because he has been cooperative with the authorities," said Justice Ministry spokesman Chin Malin.

The easing of restrictions also comes a day after Sam Rainsy, 70, a co-founder of their now-banned opposition party, flew into the region from self-imposed exile saying he aimed to return home to rally Hun Sen's opponents.

Hun Sen, 67, a former Khmer Rouge commander, has ruled the country of 16 million for more than 34 years with an iron hand and a wily ability to play off his opponents against each other and sow division among them.

"LIMITED STEP FORWARD"

The U.S. embassy described the easing of restrictions as a "limited step forward" and called on authorities to drop charges "that most see as politically motivated".

"The United States calls for the unconditional release of all those who have been arbitrarily or unlawfully detained, including journalists, civil society activists, and supporters and members of political opposition parties," an embassy statement said.

More than 50 more people have been arrested in recent weeks since Rainsy said he planned to return home from self-exile in France to rally opposition to Hun Sen.

Rainsy flew into Malaysia on Saturday, but would not say whether he still planned to go home. Cambodia's government said he was not barred from entering, but warned it would take action against anyone threatening state security.

Rainsy fled to Paris in 2015 after a conviction for criminal defamation and faces a five-year sentence in a separate case - charges he says were politically motivated.

It was only when Kem Sokha and Sam Rainsy brought together rival opposition factions ahead of elections in 2013 that they posed a serious electoral threat to Hun Sen's Cambodian People's Party (CPP). The crackdown on Cambodia's opposition prompted the European Union to begin a process to reconsider trade preferences granted under an "Everything But Arms" (EBA) trade programme for least-developed countries.

The EU accounts for more than one-third of Cambodia's exports, including garments, footwear and bicycles.

"Kem Sokha's release from house detention is a last minute attempt to deflect European anger at the shoddy way PM Hun Sen and Cambodia have dealt with human rights concerns raised in the EBA process," said Phil Robertson of U.S.-based Human Rights Watch. "But it's really too little, too late for the EBA preliminary determination on November 12."

The European Union delegation in Phnom Penh made no immediate comment. (Reporting by Prak Chan Thul Writing by Matthew Tostevin Editing by Robert Birsel & Shri Navaratnam)

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