SAN FRANCISCO/LOS ANGELES, Sept 12 (Reuters) - YouTube, the video website owned by Google Inc, will not remove a film clip mocking the Islamic Prophet Mohammad that has been blamed for anti-U.S. protests in Egypt and Libya, but it has blocked access to it in those countries.

The clip, based on a longer film, depicts the prophet as a fraud and philanderer and has been blamed for sparking violence at U.S. embassies in Cairo and Benghazi. U.S. Ambassador to Libya Christopher Stevens and three other American diplomats were killed by gunmen in an attack on the U.S. Consulate in Benghazi on Tuesday.

Google's response to the crisis highlighted the struggle faced by the company, and others like it, to balance free speech with legal and ethical concerns in an age when social media can impact world events.

Analysts say they have seen a handful of Internet companies generally take a more hands-off approach to controversial political speech, perhaps motivated by idealistic and business considerations.

In a brief statement on Wednesday, Google officials rejected the notion of removing the video on grounds it did not violate YouTube's policies, but restricted viewers in Egypt and Libya from loading it due to the special circumstances in the country.

"This video - which is widely available on the Web - is clearly within our guidelines and so will stay on YouTube," Google said in a statement. "However, given the very difficult situation in Libya and Egypt, we have temporarily restricted access in both countries."

The company added: "Our hearts are with the families of the people murdered in yesterday's attack in Libya."

The 14-minute clip is a trailer for a film called the "Innocence of Muslims," widely attributed to a man who described himself as a California-based Israeli Jew named Sam Bacile.

Under Google's procedures, YouTube users can flag objectionable content. It is reviewed by a team of Google staff scattered around the world. By late Thursday, a copy of the video had been viewed more than 122,000 times and had been flagged by users for removal, but it remained.

When videos come under review, YouTube weighs the content against "community guidelines," which prohibit hate speech, including speech that attacks or demeans a group based on religion.

"They've had a number of years to be thinking about free speech issues," Harvard law professor Jonathan Zittrain said.

"I can see them trying to keep an eye on the longer term and not wanting to go down the slippery slope of entertaining more and more demands to take things down. That can be corrosive in the longer haul."

GROWING AVERSION

Observers say Google has grown more averse to removing videos. After its 2006 acquisition of YouTube, it was accused of censorship in several high-profile controversies.

"They're squeezed on all sides," said Rebecca MacKinnon, a fellow at the New America Foundation. "But because of pressure from a lot of people who feel they made the wrong decisions, they now generally err on the side of keeping things up."

In recent years, Google has used technology to filter out videos in certain countries to comply with local regulations. Twitter announced a similar technology to censor tweets by country this year.

Others say Google has not done enough and bears a responsibility to police hate speech more closely.

In 2008, Senator Joe Lieberman of Connecticut accused Google of not doing enough to remove YouTube videos produced by Islamic militants. An Italian court in 2010 convicted four Google executives of invasion of privacy after faulting the company for not moving quickly enough to pull a video of an autistic child being bullied.

On Wednesday, Afghanistan's general director of information technology at the Ministry of Communications, Aimal Marjan, told Reuters: " We have been told to shut down YouTube to the Afghan public until the video is taken down."

YouTube did not respond to a request for comment on the Afghan government's move.

Underscoring Google's quandary, some digital free expression groups have criticized YouTube for censoring the video.

Eva Galperin of the Electronic Frontier Foundation said given Google' s strong track record of protecting free speech, she was surprised the company gave in to pressure to selectively block in an attempt "to be seen as doing something in response to the violence."

"It is extremely unusual for YouTube to block a video in any country without it being a violation of their terms of service or in response to a valid legal complaint," Galperin said. " I'm not sure they did the right thing."

Zittrain said the dilemmas facing YouTube will persist as the flow of online content continues to balloon.

"It's a more vibrant and chaotic speech marketplace than we've ever known," Zittrain said.