* Three-week conflict cleaves country along ethnic lines
* Both sides agree to ceasefire but fighting continues
* World's youngest state risks full-blown civil war (Adds SPLA chief of staff, bishop of Bor, UK envoy)
By Carl Odera and Aaron Maasho
JUBA/ADDIS ABABA, Jan 2 (Reuters) - South Sudan's army (SPLA) said it was advancing on two rebel-controlled towns on Thursday as both sides gathered in Ethiopia for peace talks to end three weeks of violence that has pushed the world's youngest nation towards civil war.
Both sides have agreed in principle to a ceasefire but neither has indicated when the fighting, which has killed more than 1,000 people and displaced nearly 200,000, will stop.
South Sudanese President Salva Kiir declared a state of emergency late on Wednesday in Unity state and Jonglei, whose respective provincial capitals of Bentiu and Bor are in the hands of militia loyal to former vice president Riek Machar.
A rebel spokesman in Unity dismissed the SPLA's comments on its advance as lies and said South Sudan's army and the national government in the capital Juba had resorted to a "war of allegations" before peace negotiations could get underway.
International pressure for a peace deal is mounting. Neighbouring countries mediating between the two warring sides have warned that continued fighting could scupper talks.
"We are advancing to Bor because these people want to come to Juba," SPLA Chief of Staff James Hoth Mai told reporters in the capital. "We don't yet have a ceasefire and we don't want them to come and get us."
Bor lies 190 kilometres (118 miles) north of Juba by road. Analysts say control of Bor hands the rebels a territorial base relatively close to Juba, strengthening their negotiating hand.
Mai said SPLA troops were also approaching Bentiu after seizing the nearby town of Mayom on Wednesday. A rebel spokesman in Bentiu said Mayom remained in rebel hands, a comment backed up by a spokesman for the United Nations mission in South Sudan.
"As of early morning, our understanding was that Mayom was in the hands of troops belonging to Division 4 of the SPLA who have defected to Machar," the U.N.'s Joe Contreras told Reuters.
STENCH OF DEATH
The clashes erupted on Dec. 15 and quickly spread to half of the country's 10 states, unsettling oil markets and raising fears of the conflict destabilising an already fragile region.
Kiir has accused his long-term political rival Machar, whom he sacked in July, of starting the fighting in a bid to seize power. The conflict has split the country along ethnic lines, between Kiir's Dinkas and Machar's Nuer group.
Machar denies Kiir's charge but he has taken to the bush and has acknowledged leading soldiers battling the government.
Bor's Anglican bishop, Ruben Akurdit Ngong, said bodies littered the town, where Nuer militias massacred Dinkas in an outburst of inter-ethnic fighting in 1991.
"The town smells terribly of human corpses," said Ngong, who fled the rebels' advance on Bor on Sunday after prayers.
The SPLA estimates the number of rebels in Bor at between 4,000 and 7,000.
Mediators say the talks in Ethiopia's capital Addis Ababa are meant to focus on how to roll out and monitor a ceasefire.
Asked if both sides were genuine about a ceasefire, Andrew Mace, Britain's acting envoy to Sudan and South Sudan, said more needed to be done to demonstrate that commitment.
"(It) looks like they're still moving for a military advantage rather than preparing a ceasefire," Mace said.
Rebel negotiators are already in Addis Ababa. An Ethiopian official said only half of the government's delegation was present, with the remainder due in the city later on Thursday.
Each side would meet with Seyoum Mesfin, one of two mediators appointed by the east African bloc IGAD. "Then (they) hopefully proceed to face-to-face talks," the official added.
The White House has raised the pressure for talks, saying there would be accountability for any atrocities and war crimes.
The U.N. mission in South Sudan said ethnic-based atrocities, often carried out against civilians by uniformed men, had taken place across the country.
The government said on Thursday it had formed a committee to investigate those involved in killing innocent people. (Additional reporting and writing by Richard Lough in Nairobi; Editing by Gareth Jones)