* Furore over Swiss grenades in IS cache helped prompt vote
* Foes said looser export rules pose reputational risk
* Vote makes it difficult for government to force changes
By John Miller
ZURICH, Sept 26 (Reuters) - After an uproar over Swiss-made hand grenades found with Islamist militants, lawmakers on Wednesday voted to block the government from forcing through new weapons export rules aimed at allowing sales to nations fighting civil wars.
The lower house of the Swiss parliament voted 97-82 to stop the government from unilaterally deciding on criteria governing the sale of Swiss-made weapons abroad.
Though the vote is not the final word, parliamentary opposition makes it unlikely the government can follow through on its proposed changes.
Foes of looser rules said the proposed changes open the door to weapons landing in the wrong hands and pose a reputational risk.
"This doesn't just have to do with whether a company is allowed to deliver to just any old country, it has to do with our values, the values of a humanitarian Switzerland," parliament member Martin Landolt said.
Under the government's proposal, countries fighting civil wars would be able to buy Swiss arms, provided there was no reason to believe the weapons would be used in the conflict.
The Swiss weapons industry pushed for the concession, on the grounds that existing restrictions make it tough for them to compete with weapons producers in other countries.
Switzerland's defence industry includes state-owned RUAG Holding, as well as subsidiaries of General Dynamics and Germany's Rheinmetall.
Swiss newspapers reported earlier this year that grenades made by RUAG, a German acronym for "Weapons Enterprise Corporation," were seized from an Islamic State cache in Syria.
RUAG acknowledged the grenades may have been among 250,000 delivered to the United Arab Emirates in 2003/2004. Grenades from the UAE shipment were also discovered in 2012 with the Free Syrian Army fighting President Bashar al-Assad's government.
Proponents of looser export rules had previously dismissed the furore over the grenades, calling it "purely emotional".
They contend Switzerland needs robust domestic weapons makers for security, yet cannot buy arms in numbers sufficient to prop up the industry by itself. As a result, Swiss-based groups need more flexibility to seek clients abroad, they said.
"The government -- past, present and future -- has had a responsibility...to do what is right for the country," Economy Minister Johann Schneider-Ammann, a supporter of looser rules, told parliament. "And what is right for the country, among many things, is to always be able to protect our sovereignty through armed neutrality."
In 2017, Swiss companies exported 446.8 million Swiss francs ($461.5 million) in weaponry to 64 countries, up eight percent from 2016. Nearly 50 percent went to Europe, with exports to the Americas and Asia on the rise.
$1 = 0.9682 Swiss francs Reporting by John Miller, Editing by William Maclean