BANGKOK, Sept 22 (Reuters) - Malaysian finance minister Anwar Ibrahim was dismissed because he threatened the power of Prime Minister Mahathir Mohamad, but his arrest may not end his challenge, Thai newspaper The Nation said on Tuesday.

In an editorial headlined ''Jailing Anwar only weakens Mahathir,'' the English-language daily compared Mahathir to Indonesia's ex-president Suharto and said he was ''caught in a political maelstrom'' that had similarities with ''the beginning of the end'' of the Indonesian leader.

Malaysian police and anti-government protesters clashed for the second straight day on Monday and a sweeping law used to arrest sacked finance minister Anwar was also used to round up his allies.

The Thai government has not taken sides in the political conflict in its southern neighbour but the foreign ministry issued a brief statement late on Monday saying the dispute was "totally the internal affair of Malaysia.''

The ministry said it hoped the situation would be resolved in accordance with the constitution and avoid violence to prevent an escalation of the situation.

''Yesterday, Mahathir finally removed his mask and showed his iron fist,'' the newspaper said.

''For all the allegations levelled against Anwar -- from sodomy to sedition -- it is clear there is really only one reason why his Number Two was dismissed: Anwar was a threat to Mahathir's grip on power.''

''That Anwar is being held under the ISA (Internal Security Act) indicates that Mahathir is hard pressed to prove allegations of sexual misconduct, corruption, sedition and treason. With ISA, Anwar will not be able to defend himself.'' Malaysia's ISA allows for indefinite detention without trial.

But the newspaper said Anwar's arrest was unlikely to stop the rebellion he had started.

''If Mahathir thinks he will be able to put a lid on the growing cries for reform by arresting Anwar, he (had) better think again. Over the past two weeks, Anwar has emerged from Mahathir's shadow to be his own man.

With Anwar detained, the newspaper said it expected Anwar's wife, Wan Azizah Wan Ismail, to lead the struggle.

''As for Mahathir, he is no doubt weakened by the grassroots show of support for Anwar. Some two weeks ago, he began his move to destroy a serious political rival, and he has succeeded to a certain extent. But in so doing, Mahathir could end up destroying himself,'' it said.

The Nation had the only editorial comment on the Malaysian situation in the main Thai newspapers on Tuesday.

In recent months Thailand has pressed its fellow members of the Association of South East Asian Nations (ASEAN) to adopt a policy of ''flexible engagement'' to allow them to voice occasional criticism of the domestic affairs of neighbouring governments.

But the government, one of the founders of ASEAN in the 1960s, still usually observes the grouping's current policy of "constructive engagement,'' which allows no such criticism.''