KIROV, Russia (Reuters) - Russian opposition leader Alexei Navalny was sentenced to five years in jail for theft on Thursday, an unexpectedly tough punishment which supporters said proved President Vladimir Putin was a dictator ruling by repression.
Navalny, an anti-corruption campaigner who led the biggest protests against Putin since he took power in 2000, hugged his wife Yulia and his mother, shook his father's hand and then passed them his watch before being led him away in handcuffs.
"Shame! Disgrace!" protesters chanted outside the court in Kirov, 900 km (550 miles) northeast of Moscow. Some supporters wept and others could barely hide their shock and anger.
The United States and European Union expressed concern over the conviction, saying it raised questions about the rule of law in Russia and Putin's treatment of opponents.
Russian shares fell on concerns the ruling could provoke social unrest, after a case that has led to comparisons with the political "show trials" under Soviet leader Josef Stalin.
In a last message from court, Navalny, 37, referred to Putin as a "toad" who abused Russia's vast oil revenues to stay in power, and urged his supporters to press on with his campaign.
"Okay, don't miss me. More important - don't be idle," he wrote on Twitter. The opposition said they planned protests, starting on Thursday in Moscow, where police were out in force.
State prosecutors had asked the court to jail Navalny for six years on charges of organizing a scheme to steal at least 16 million roubles ($494,000) from a timber firm when he was advising the Kirov region governor in 2009.
But even a five-year sentence means he will not be able to run in the next presidential election in 2018 or for Moscow mayor in September as he had planned. Some political analysts had expected the court to hand down a suspended sentence, to keep Navalny out of prison but rule out any political challenge.
"The court, having examined the case, has established that Navalny organized a crime and ... the theft of property on a particularly large scale," Judge Sergei Blinov said, reading rapidly and without emotion. He hardly looked up while reading the verdict, which took about three and a half hours.
Pyotr Ofitserov, Navalny's co-defendant, was convicted as an accomplice and sentenced to four years in prison.
Navalny, a powerful orator who has accused the authorities of being "swindlers and thieves", stood in silence with a puzzled expression as he listened to the verdict. He has 10 days to appeal, and his lawyer, Vadim Kobzev, said he would do so.
The head of his campaign staff, Leonid Volkov, said Navalny had told him he would withdraw from the Moscow race if he was jailed, and that Navalny would make a statement about this on Friday. "There is no sense in taking part in it," Volkov said.
"DICTATOR"
Navalny had said the charge against him was politically motivated and that the verdict would be dictated by Putin.
He denied guilt and pointed out that an initial investigation, over accusations that he had pressured a state forestry company to agree to a disadvantageous deal with a middleman firm, had been closed for lack of evidence.
Since Putin returned to the presidency after four years as prime minister, women from the punk band Pussy Riot have been jailed for a protest against him in Russia's main cathedral, and 12 opposition activists have gone on trial over violence that erupted at a protest on the eve of his inauguration in May 2012.
Another protest leader, Sergei Udaltsov, is under house arrest.
The Kremlin denies that Putin uses the courts for political ends, and the judge rejected Navalny's claim of political motivation. Putin's spokesman, Dmitry Peskov, did not immediately answer calls after the sentence was pronounced.
Opposition politician Boris Nemtsov, who attended the hearing, said he was "shocked".
"With today's ruling, Putin has told the whole world he is a dictator who sends his political opponents to prison," Nemtsov told Reuters.
Former finance minister Alexei Kudrin, a longtime Putin ally, saw the verdict as "an attempt to isolate him (Navalny) from society and the electoral process".
The U.S. ambassador to Russia, Michael McFaul, said the United States was "deeply disappointed" and saw political motivations. A spokesman for EU foreign policy chief Catherine Ashton said the charges had not been substantiated and this raised "serious questions" about the rule of law in Russia.
Kudrin said the verdict would hurt business activity and the investment climate in Russia, adding to a pall over a country where corruption and lack of property rights undermine the attraction of potentially big profits.
"We are not expecting any major protests on Red Square or teargas but again, general sentiment is not improving," said Kirill Yankovsky, a trader at Uralsib Capital. He added that the verdict would do nothing to reduce the big discount on prices of shares in Russia compared to its emerging-market peers.
ECHOES OF STALIN
Navalny is the most prominent opposition leader to be prosecuted in Russia since Soviet times.
"For Russia, there is nothing unusual about convicting political opponents on criminal charges," imprisoned former oil tycoon Mikhail Khodorkovsky wrote, adding it was a common practice during Stalin's "terror" in the 1930s.
Khodorkovsky was jailed in 2005 for tax evasion and fraud after he fell out with Putin. His $40 billion company, Yukos, was carved up and sold off, mainly into state hands, and he was convicted of theft and money-laundering at a new trial in 2010.
William Browder, a Briton who was once one of Russia's biggest foreign equity investors but fell foul of the authorities, also referred to the start of Stalin's show trials by saying: "This is like 1937 all over again."
Before a planned protest in a square near the Kremlin, riot police trucks were parked nearby. In Kirov, police detained at least two Navalny supporters protesting outside the pre-trial detention center where he was taken after the sentencing. About 600 people protested in Yekaterinburg in the Ural mountains.
(Additional reporting by Maria Tsvetkova and Alexei Anishchuk; Writing by Steve Gutterman and Timothy Heritage; Editing by Andrew Roche)