By Jalil Hamid and Liau Y-Sing

(Reuters) - Malaysia is expecting a court ruling any day now that could shake society to its foundations: does a Muslim have the right to convert to another faith?

A Muslim by birth, Lina Joy decided to become a Christian, marry and raise a family. But in Malaysia, where Islam is the official religion, this is an affair of state, not conscience.

The 42-year-old has asked the Federal Court, the country's highest civil judicial authority, to acknowledge her decision to convert to Christianity and is now awaiting a verdict.

Whatever the outcome, the decision could pose a headache for a government that is trying to meet the demands of the majority Muslim population and the sizeable minority of non-Muslims.

"The fundamental question in Lina's case is whether Muslims in this country can convert?" said political analyst Abdul Razak Baginda.

It's a tricky legal question in multiracial, multi-religious Malaysia. Ethnic Malays, who make up just over half of Malaysia's 26 million people, are deemed Muslims from birth.

Azlina Jailani was one of them. She was brought up as a Muslim but at the age of 26 she decided to become a Christian.

In 1999, the National Registration Department allowed her to change the name in her identity card to Lina Joy but the ID entry for her religion remained as "Islam."

Until the entry is deleted, she cannot legally marry outside the Muslim faith. The legal wrangling began when she took the department to court over the anomaly.

Joy could not be reached for comment.

Constitutionally, freedom of religion is guaranteed. But in reality, conversion out of Islam comes under the ambit of sharia or Islamic courts. And under sharia law, renouncing the Islamic faith is punishable by fines or jail. It isn't an option.

'POLITICAL DYNAMITE'

Muslims who leave Islam end up in legal limbo, unable to register their new religious affiliations or to legally marry non-Muslims. Many keep quiet about their choice or emigrate.

A court victory for Joy could be explosive.

"It's political dynamite. It will create instability," Abdul Razak said. "For decades, the position of Malays and Muslims have been guaranteed.

"It will open the floodgates. Now you see Malays are going to convert and the government sanctions that. Definitely there will be a huge backlash and PAS is going to town with it."

Parti Islam se-Malaysia (PAS), the country's biggest Islamic opposition party, agrees.

"It will be a bad precedent," PAS deputy chief Nasharuddin Mat Isa told Reuters. "It will create some uneasiness in the Malay community. It could lead to demonstrations."

The influential Angkatan Belia Islam Malaysia, the Muslim youth group once led by former deputy premier Anwar Ibrahim, wrote a letter asking the Federal Court to dismiss the appeal.

"Allowing Malays to leave Islam automatically will erode the status, the rights and the privileges of Malays," it said.

But a ruling against Joy could also inflame opinion among non-Muslims, who are already aggrieved over what they see as the gradual encroachment of Islamic law into civil society.

"If they rule against Lina Joy, the whole question of religious liberty -- the freedom of conscience, choice, expression and thought of an individual -- will be greatly affected," said Wong Kim Kong, secretary-general of the National Evangelical Christian Fellowship Malaysia, which represents about two-thirds of Malaysia's roughly 4,000 churches.

But he agreed that a court victory for Joy could spark a Muslim backlash. "This group may sow discord or even create public disorder that will result in greater polarisation of the races and religion in the country," Wong said.

For Islamic scholars, Joy cannot win.

"If Islam were to grant permission for Muslims to change religion at will, it would imply it has no dignity, no self-esteem," said Wan Azhar Wan Ahmad, senior fellow at Malaysia's Institute of Islamic Understanding.

"And people may then question its completeness, truthfulness and perfection."