* German anti-Muslim rallies strongest in Dresden

* Anti-immigrant slogans strike chord with voters, AfD could gain

* Protesters emboldened by Islamist attacks in France

By Madeline Chambers

DRESDEN, Germany, Jan 14 (Reuters) - Weekly marches by the German anti-Islam movement PEGIDA may not spread much beyond the city of Dresden where they began, but their message is having a profound impact on mainstream political parties.

The sight of 25,000 people waving German flags in the dark and chanting "Luegenpresse" (Lying press), a Nazi term, and "Wir sind das Volk" (We are the people), taken up before the Berlin Wall fell, leaves a strong impression.

This week's record number of marchers were emboldened by the Islamist attack on French magazine Charlie Hebdo.

Co-founder Lutz Bachmann, 41, says his 'Patriotic Europeans Against the Islamisation of the West' campaign, born on Facebook three months ago, represents the silent majority and has huge potential across Germany and Europe.

"This is the tip of the iceberg," Bachmann, who has a criminal conviction for burglary, told Reuters in an interview.

While PEGIDA leaders deny they are racist and are careful to distinguish between Islamists and most of Germany's 4 million Muslims, slogans like 'No Sharia!' and 'In 2035 Germans will be a minority!' betray a hostility to foreigners.

At Monday's rally, Bachmann called on politicians to force immigrants to integrate.

"Every religion is welcome in Germany. But you can't try to influence German culture and life," Kathrin Oertel, a PEGIDA co-founder, told Reuters.

To the 35,000 people who joined a state-organised protest against PEGIDA on Saturday in Dresden and about 100,000 across Germany on Monday, the movement is openly racist.

"They are using a fear of Islam to put chauvinism and racism on the street," said Michael Nattke of Dresden's Culture Office.

Angela Merkel has condemned the movement as racists "with hatred in their hearts", strong language for the chancellor.

The debate has exposed divisions among her conservative supporters on how to tackle rising immigration, and a new protest party, the Alternative for Germany (AfD), is gaining ground as a result.

DRESDEN SPECIAL

PEGIDA owes much of its success to the peculiarities of Dresden, a Baroque city destroyed by the Allies in 1945 and since painstakingly restored.

Mark Arenhoevel, a politics professor at Dresden's Technical University, says Dresden is less mixed than other cities. "There is more xenophobia than in some other cities so there is big potential for mobilising support," he said.

In Communist times, Dresden was known as "Valley of the Clueless" because western media signals could not be picked up.

It has a tradition of holding some of Europe's biggest neo-Nazi marches on Feb. 13 to commemorate the firebombing of the city during the final months of World War Two.

Nattke estimates 2,000 neo-Nazis and right-wing soccer hooligans attend PEGIDA rallies, joining ordinary conservatives.

Bachmann has no intention of weeding out neo-Nazis.

"No one has 'I am a Nazi, I am a hooligan' written on their forehead," Bachmann said. "This is a public event and as the organiser I don't have the authority to refuse people."

Added to a traditional conservatism, many people in Dresden and the surrounding state of Saxony are disillusioned with politics because the same party -- Merkel's Christian Democrats (CDU) -- has ruled the state since reunification 25 years ago.

"I'm not a Nazi but everyone who enjoys our hospitality must mix in and respect our culture," said a sign held by Dresden resident Joerg Schultz, 45.

Xenophobia is also fed by the city's low number of immigrants and disproportionately small Muslim population.

A poll last week showed that about 70 percent of non-Muslim Germans in Saxony feel threatened by Muslims.

A sharp rise in the number of immigrants and asylum seekers has fuelled a debate in Germany, as in other European countries, with some politicians calling for tighter immigration rules.

Although its asylum laws are among the most liberal in the western world, Germany has never become a genuine melting pot of cultures.

BOOST FOR AFD?

PEGIDA's leaders, who have in the past voted for the pro-business Free Democrats, refuse to back any single party.

"We are above party politics but have common ground with every party, even the Greens and the Left party," said Bachmann. "But we want to influence the political agenda."

Among the demands Bachmann shouted to the crowd this week from his open van were a new immigration law based on a points system according to people's skills, enforcing an 'obligation to integrate' on immigrants, and direct democracy via referendums.

Analysts predict they will run out steam and point out that only a few hundred show up to PEGIDA demonstrations in other German cities.

However, PEGIDA has exposed deep divisions among Merkel's conservatives with some calling for new, more restrictive immigration laws, and others accusing Merkel of boosting the AfD by ignoring her party's right wing.

Many at the Dresden rally said they were tempted by the AfD, some of whose leaders met PEGIDA and are wooing voters by adopting PEGIDA's language on immigration.

In a pitch to PEGIDA supporeters, AfD leader Bernd Lucke has declared that "Islam is alien to Germany".

PEGIDA's impact is nonetheless still seen as limited.

"PEGIDA is not a danger for Germany's party system, but a Saxon speciality for now," said Forsa pollster Manfred Guellner.

But Bachmann and Oertel are not giving up. A PEGIDA march in Oslo this week attracted 200 people, although a counter demonstration drew 900. Next month, the group plans a march in Switzerland. (Additional reporting by Stine Jacobsen in Oslo; Reporting by Madeline Chambers; Editing by Giles Elgood)