By Jim Wolf

WASHINGTON (Reuters) - The Organization of American States suspended Honduras on Saturday after a caretaker government refused to restore President Manuel Zelaya, who was toppled in a military coup last weekend.

The OAS took the rare step to suspend one of its members at a meeting in Washington after Honduras' interim rulers ignored an OAS ultimatum to restore Zelaya.

Zelaya, a leftist who took power in 2006 and had been due to leave office in 2010, was ousted by troops and sent into exile last Sunday after a dispute over presidential term limits.

The suspension was with immediate effect, according to a resolution read at the special session late on Saturday night.

An OAS suspension could complicate access to credits from regional lender Inter-American Development Bank for Honduras, which is the third poorest country in the Americas after Nicaragua and Haiti. The IADB said last week it was suspending loans over the coup.

Honduras, a coffee and textile exporter, is only the second country suspended by the Western Hemisphere's top diplomatic body after Cuba, which was barred in 1962 as Fidel Castro took the island toward communism in the years after his 1959 revolution.

Zelaya, a wealthy businessman who edged to the left after he came to power, was ousted last Sunday. He had upset the ruling elite, including members of his own Liberal Party, with what critics say was an illegal attempt to lift presidential term limits and by establishing closer ties with leftist Venezuelan President Hugo Chavez, a U.S. adversary.

The Obama administration, European governments and Zelaya's left-wing allies have condemned his ouster, which has triggered the gravest political crisis in Central America in decades. The caretaker government has said it legally removed a president who violated the constitution.

OAS Secretary-General Jose Miguel Insulaza told the special meeting earlier that the region should suspend Honduras after the interim rulers who took power after the coup rejected an OAS demand to reinstate Zelaya by Saturday.

"They understand the risks of eventual sanctions, especially in the economic field," he said. "Due to the situation, I believe there is little alternative.

INTERIM GOVERNMENT DEFIANT

Insulza, who visited the Honduran capital Tegucigalpa on Friday, said the interim government showed no willingness to reinstate Zelaya or recognize there had been a rupture in the constitutional order.

"The interim regime has not said so, but their lack of international recognition a week after the coup is worrying the de facto government," the OAS chief said.

The interim government remained defiant, announcing it would renounce the OAS charter, and has rallied supporters on the streets of the capital and other cities in a show of support.

"It is better to pay this high price... than live undignified and bow the our heads to the demands of foreign governments," said Roberto Micheletti, named caretaker president by the Honduran Congress after Zelaya's ouster.

In Tegucigalpa, several thousand Zelaya supporters marched toward the presidential palace on Saturday, observed by troops posted in strategic spots and a military helicopter overhead.

A night-time curfew is still in place but the capital city is mostly calm during the day.

Some of Zelaya's left-wing allies have said they would travel with the exiled leader to Honduras on Sunday, though that plan seemed to be in doubt. The interim government has said it would arrest the ousted leader if he returns.

(Additional reporting by Patrick Markey, Gustavo Palencia and Mica Rosenberg in Tegucigalpa, Editing by Frances Kerry)