* Reuters reporter witnesses air strike in South Sudan
* Sudan denies involvement in bombing
* Sudan's President Bashir rules out return to talks (Adds U.N. chief, paragraph 4)
By Hereward Holland
OUTSIDE BENTIU, South Sudan, April 23 (Reuters) - Sudanese war planes bombed a market in the capital of South Sudan's oil-producing Unity State on Monday, residents and officials said, an attack the southern army called a declaration of war.
Sudan denied carrying out any air raids but its President Omar Hassan al-Bashir ramped up the political tension by ruling out a return to negotiations with the South, saying its government only understood "the language of the gun".
A Reuters journalist saw aircraft dropping two bombs near a bridge linking two areas of Unity's capital Bentiu, although it was not possible to verify the planes' affiliation. He saw market stalls ablaze and the body of one child.
U.N. Secretary-General Ban Ki-moon's press office issued a statement saying he "condemns the aerial bombardment on South Sudan by Sudanese Armed Forces and calls on the Government of Sudan to cease all hostilities immediately."
Weeks of border fighting have brought the neighbours closer to a full-blown war than at any time since South Sudan split from Sudan as an independent country in July.
The two territories went their separate ways last year without settling a list of bitter disputes over the position of their shared border, the ownership of key territories and how much the landlocked South should pay to transport its oil through Sudan.
The disputes have already halted nearly all the oil production that underpins both struggling economies.
"Bashir is declaring war on South Sudan. It's something obvious," southern army (SPLA) spokesman Philip Aguer said after the Bentiu bombing.
Aguer and the United Nations Mission in South Sudan said two people were killed in the air strike in Unity state where the Greater Nile Petroleum Operating Company (GNPOC) operates blocks. China's CNPC leads this consortium, along with Malaysia's Petronas and India's ONGC Videsh.
"Early reports indicate the bombings started at 8.30 hours and that Rubkona market has been struck," the U.N. mission said in a statement, without spelling out who carried out the attack.
"These indiscriminate bombings resulting in the loss of civilian lives must stop," said Hilde F. Johnson, Special Representative of the Secretary-General for South Sudan.
The mission said its officers had seen one bomb land on the market and three near a bridge. "A young boy burned to death as the hut he was in caught fire from the blast in Rubkona market area," it quoted one of its officers as saying.
Bentiu is about 80 km (50 miles) from the contested and poorly marked border with Sudan.
Sudan denied carrying out any air attacks in the area. "We have no relation to what happened in Unity state, and we absolutely did not bomb anywhere in South Sudan," the country's military spokesman, Al-Sawarmi Khalid, said.
"LANGUAGE OF THE GUN"
In the worst fighting since the split, South Sudan earlier this month seized the disputed oil-producing territory of Heglig - then announced it had started withdrawing on Friday, following sharp criticism from the U.N. Secretary-General.
Bashir, dressed in military uniform, visited the Heglig region on Monday, descending from his plane to shouts of "Allahu akbar" - "God is greatest" - from soldiers and officials gathered on the tarmac.
Speaking to Sudanese army troops, he vowed not to negotiate with South Sudan after it had occupied the region.
"We will not negotiate with the South's government, because they don't understand anything but the language of the gun and ammunition," he said at a barracks near the oilfield along the contested border.
A Reuters journalist on an official tour of the region filmed bombed-out pipelines dripping oil in the widely damaged Heglig oilfield, as well as heavy damage to the central processing facility, power station and other infrastructure.
Abdelazeem Hassan Abdallah, an oil worker in Heglig, accused South Sudan's forces of attacking the oilfield.
"They know how to do the job completely. They destroyed our main power plant, and they destroyed our processing facilities," he told Reuters.
General Kamal Abdul Maarouf, a Sudanese army commander who led the Heglig battles, said his troops had killed 1,200 South Sudanese soldiers in fighting in the area, an account South Sudan denied.
Journalists on the official trip said they saw bodies strewn on the road to the barracks. Some clearly had South Sudanese flags on their uniforms, but it was not always possible to verify their nationalities.
Aguer dismissed Maarouf's report. "The number of casualties the SPLA has suffered since the 26th or March doesn't exceed 50," he said.
South Sudan won its independence in a referendum that was promised in a 2005 peace accord that ended decades of civil war between Khartoum and the south.
South Sudan's armed forces have 10 helicopters but no fixed-wing aircraft, except for one Beech 1900 light transport aircraft, according to an International Institute for Strategic Studies report.
Sudan has 61 combat capable aircraft, including 23 fighter aircraft.
The Satellite Sentinel Project, founded by Sudan activists, said recent satellite imagery showed Khartoum had "dramatically increased the number of military strike aircraft at two airbases and that many are in range to fly deep into South Sudan."
The monitoring group said satellite imagery was consistent with reports that Sudanese forces bombed "an apparent civilian area" near a bridge in Bentiu. It also said it appeared the SPLA had looted a Sudanese military base in Heglig, which could be a violation of international law. (Additional reporting by Khalid Abdelaziz and Alexander Dziadosz in Khartoum, El-Tayeb Siddig in Heglig, Yara Bayoumy in Juba; Writing by Ulf Laessing, Alexander Dziadosz and Yara Bayoumy; Editing by Andrew Heavens and David Brunnstrom)