(Updates with death of man from Nauru camp, rejection of New Zealand offer, prime minister quote, reaction, protest, details, paragraphs 6, 8, 11-12, 17-21)
* Pacific neighbours at loggerheads after PNG closes camp
* Pressure grows on Australian government before election
* Asylum seeker who set himself alight on Nauru dies
* Harsh policy backed by successive Australian governments
By Colin Packham
SYDNEY, April 29 (Reuters) - Lawyers for 850 asylum seekers held in a controversial detention centre in Papua New Guinea said on Friday they planned to seek potentially billions of dollars in compensation, as Australian officials prepared to travel to PNG for emergency talks.
PNG announced this week the closure of the detention centre it operates on behalf of Australia, which has pursued a hardline immigration policy criticised by the United Nations and international human rights organisation.
The closure of the Manus Island facility - which holds asylum seekers fleeing violence in the Middle East, Afghanistan and South Asia - has the two South Pacific neighbours at loggerheads at a politically sensitive time for Australia.
Each says responsibility for the detainees' welfare rests with the other. The number trying to reach Australia is small compared with Europe, but immigration has long been a sensitive political issue.
Under Australia's policy, asylum seekers intercepted trying to reach the country by boat after paying people smugglers are sent for processing to camps in Manus Island or the tiny Pacific island of Nauru, which holds another 500 people in detention.
They are told they will never settle in Australia.
The harsh conditions and reports of systemic child abuse at the camps have drawn wide criticism inside and outside Australia and have become a major headache for Australian Prime Minister Malcolm Turnbull during campaigning for July national elections.
Domestic opposition to the policy was stirred even more on Friday with confirmation that a 23-year-old man, who set himself on fire earlier this week in protest against his treatment on Nauru, had died.
Turnbull has warned against being "misty-eyed" over immigration and Australian Immigration Minister Peter Dutton reiterated on Friday there would be no policy change.
Dutton suggested one option was to transfer those held on PNG to the Nauru facility.
"MARKETING OPPORTUNITY"
New Zealand on Friday repeated an earlier offer to accept 150 of the refugees but that was again rejected.
"Settlement in a country like New Zealand would be used by the people smugglers as a marketing opportunity," Turnbull told Australian radio.
Lawyers in PNG will go the country's Supreme Court on Monday to argue for the immediate release of Manus Island detainees back to Australia, as well compensation for their detention.
The legal action has support, at least in part, from PNG's High Commissioner to Australia, Charles Lepani, who said on Thursday responsibility for what to do with the men rested with Canberra.
PNG-based lawyer Ben Lomai, who represents more than 300 of the detained men, told the Post Courier newspaper he would file a compensation case on Monday after the Supreme Court's ruling.
"We can go straight to assessing reasonable compensation without having to prolong the case any further," Lomai said.
Refugee advocacy group Human Rights Watch described the death of the man on Nauru as "senseless" and a result of "Australia's inhumane refugee policies".
"Refugees who have fled persecution in their homelands don't deserve a life in limbo in a detention centre or effectively imprisoned on a tiny remote island," said the group's Australian director Elaine Pearson (LON:PSON).
Confirmation of his death came as about 200 protesters, flanked by dozens of police, marched through central Sydney carrying signs and chanting slogans such as "refugees are welcome here".
The fallout from the policy even extended into Australia's equities market on Friday. Broadspectrum Ltd BRS.AX , the operator of the Manus Island centre, agreed to a A$769 million ($586 million) bid from Spain's infrastructure giant Ferrovial SA FER.MC after PNG's decision to close the camp sent its share price soaring. board had previously urged shareholders to reject several offers from Ferrovial, most recently on April 6, but said late on Thursday the PNG decision had increased uncertainty over its future earnings.
($1 = 1.3125 Australian dollars)
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