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By Martin Petty

BANGKOK, Nov 9 (Reuters) - Thailand and Cambodia are embroiled in a diplomatic stand-off over the appointment of former Thai premier Thaksin Shinawatra, on the run from a graft conviction, as an adviser to the Cambodian government.

Rivalry between the two neighbours dates back centuries and tensions are never far from the surface. But ties have sunk to their lowest in almost seven years, with both sides recalling their ambassadors and freezing agreements.

WHY HAS THAILAND REACTED SO STRONGLY?

The Thai government sees Thaksin's new job as a slap in the face, but what seems to have irked Bangkok so much is Cambodia's refusal to extradite Thaksin, should a request be made, on the grounds that his graft conviction was politically motivated.

That is seen as an attack on Thailand's judicial system.

There are other reasons, however. Thai Prime Minister Abhisit Vejjajiva has had enough trouble from the self-exiled Thaksin as it is, and the prospect of him wielding his sizable influence from across the border could hamper his efforts to bring stability to his deeply polarised country.

WHAT IS THE HISTORY OF TENSIONS?

There is no love lost between the two countries. Cambodia's Khmer Empire, dating back to the ninth century, was once the dominant power in the region and ruled over much of modern Thailand from its Angkor Wat complex, prompting a series of rebellions.

A big source of tension is Preah Vihear, an 11th century temple that straddles their disputed border. Although an international court ruling awarded it to Cambodia in 1962, it is still the source of nationalist squabbles that have led to deadly border skirmishes.

Diplomatic ties were severed in 2003 for almost three months after Cambodians went on the rampage in Phnom Penh, torching the Thai embassy and vandalising Thai businesses over an unsubstantiated rumour that a famous Thai actress claimed Angkor Wat belonged to Thailand.

WHAT IMPACT WILL THE FREEZING OF TIES HAVE?

Both Abhisit and his Cambodian counterpart Hun Sen have said they will not close the border, which would disrupt trade and tourist movements between the two countries.

Thailand sought to hit impoverished Cambodia where it hurts by halting a 2001 agreement to jointly develop a disputed area of the Gulf of Thailand believed to have abundant natural gas reserves. Both countries have already awarded concessions to firms such as Chevron.

Thailand believes Thaksin, a former negotiator on the issue while in office, could get involved from the Cambodian side, but it has no evidence to prove it. Hun Sen might also get a more favourable deal if Thaksin or his allies return to power, so it would be in his interests to give the billionaire a helping hand.

However, the suspension of the agreement is unlikely to have much of an effect, since negotiations were moving at a snail's pace, with the issue years away from being resolved.

IS THERE A RISK OF MILITARY ESCALATION AT THE BORDER?

Both sides have repeatedly pledged not to engage in any confrontation but it remains to be seen how much control politicians have over their trigger-happy troops. Cambodia reduced its military presence a few months ago and Hun Sen pledged on Sunday to pull more troops out.

WHAT WILL THE IMPACT BE ON TRADE, INVESTMENT?

Not a big one. Cambodia's economy depends heavily on South Korea and China, and very little on Thailand, which it turn relies on its neighbour for just 0.05 percent of total imports.

Despite endemic corruption and various internal problems, investors are still drawn to Cambodia and it is unlikely the latest tit-for-tat row with Thailand will change anything.

Providing the border remains open and peace prevails, it will not make much difference. However, the thousands of Thais that flock to Cambodia's border casinos each week might think twice about a flutter while tensions remain high.

(Editing by Alan Raybould and Dean Yates)