By Brian Love and Ingrid Melander

PARIS (Reuters) - France's government said on Wednesday that trade unions could hold a protest march in Paris after earlier telling police to ban the demonstration, reversing course under fire from union bosses and dissenters in the ruling Socialist Party.

Interior Minister Bernard Cazeneuve said he had personally ordered the ban but then decided to allow Thursday's protest against plans to loosen labor laws after an emergency meeting with the unions.

"No violence will be tolerated," said Cazeneuve.

The ban would have been the first outlawing of a union-organized demonstration since 1962.

Violence on the fringes of recent protests has stretched a police force already challenged by the demands of a state of emergency in place since Islamist militant attacks on Paris last November and fan violence during the Euro 2016 tournament.

The initial decision to ban the march sparked instant condemnation from lawmakers across the political divide and stirred tensions within the deeply divided Socialist Party.

Philippe Martinez, leader of the hardline CGT union, claimed "a victory for unions" and sought to press home the advantage with a call for direct talks with Hollande over the government's plans to make it easier to hire and fire workers.

"The president has no other choice but to meet with the unions, and quickly," Martinez told a news conference.

Trade unions say the proposed reforms would erode the rights of workers and want the draft bill scrapped, while the government says it is key to tackling unemployment which is running at 10 percent.

Hollande and his government are standing firm against union demands, even though opinion polls show he is France's most unpopular leader in decades.

"We will press on with this bill ... and it will be adopted because it is in the country's interest," Prime Minister Manuel Valls told lawmakers.

But Frederic Dabi of pollster Ifop said Wednesday's compromise over the protest could spur hopes for a broader agreement on the draft law which is currently being debated in the Senate.

"French voters don't like the law but they also want this to be over with. They consider the government and the unions are both responsible for the stalemate," Dabi said, adding the government U-turn on the ban showed how tense the situation was.

Cazeneuve authorized a 1.5 km (1 mile) loop around a waterway at the foot of the Place de la Bastille square.

A police union official said ensuring security would be manageable as long as officers had the authority to arrest known troublemakers on sight and to usher crowds out of the area once they had completed the circuit.

Karine Berger, a Socialist lawmaker who has been critical of the government's policies, said on Twitter: "We're back to what French democracy should be like."

Backbench lawmaker Christian Paul had earlier said Valls was making "a historical mistake" with the ban, highlighting the rifts within the Socialist Party year ahead of presidential and legislative elections.

The last union-organized protest march to be banned in France -- against the war in Algeria -- was in 1962. The ban was defied, leading to clashes with police in which nine people died, eight of them CGT members.

(Additional reporting by Richard Lough, Simon Carraud, Gerard Bon and Emile Picy; Writing by Richard Lough and Brian Love; Editing by Catherine Evans)