JAKARTA, Dec 21 (Reuters) - Exploitation of Indonesia's vast natural resources is spinning out of control, with illegal operations damaging the environment and societies in ways that increase the risk of communal conflict, a report said on Friday. The report by the Brussels-based International Crisis Group (ICG) said since the downfall of former President Suharto in 1998 there had been an upsurge in illegal logging, mining and fishing as various parties struggled for control of the lucrative trade. Illegal activities are protected and in some case organised by bureaucrats and the security forces, with the military and police deeply involved in illegal logging, it said. "The exploitation of Indonesia's natural resources is running out of control...In the case of logging, the problem is so serious that it threatens to destroy some of Indonesia's largest forests within a decade," the ICG said, while noting there were also scattered signs of hope for the industry. It recommended donors consider linking future loans to the curbing of illegal exploitation if vested interests kept blocking reform of a vital revenue earning sector for the government. The exploitation of resources such as timber and minerals during Suharto's three-decade autocratic rule was dominated by firms with strong political connections. With the backing of powerful patrons in Jakarta, these firms paid little heed to the environment or local peoples, stoking resentment that has periodically erupted into violence. The report said timber felling in Central Kalimantan province combined with the lack of respect for local communities, while not the ultimate cause, had created conditions for clashes earlier this year that left some 500 people dead when indigenous Dayaks fought Madurese settlers from an island off Java. FRUSTRATION AND ANGER The report said deforestation of Kalimantan since the 1970s had created frustration and anger among Dayaks who had previously lived in the forests, while at the same time building a timber industry that had attracted migrants from across Indonesia. Madurese were the main victims of the violence, part of periodic communal clashes that have haunted some areas of Indonesia since it plunged into economic crisis four years ago. "There is a risk that the current struggle to control natural resources could also lead to conflicts," said the report. Citing U.N. figures, it said Indonesia had the world's third largest expanse of tropical forest after Brazil and the Democratic Republic of Congo, but this was shrinking rapidly. Precise figures on total forest area were not available.