UPDATE 1-Algerian troops kill three Islamist gunmen in second day of assault

(Adds more details from security sources)

ALGIERS May 20 Algerian security forces killed three armed Islamist militants east of the capital on the second day of a major offensive, the defence ministry said on Wednesday, bringing to 25 the total number of insurgents shot dead.

One security source said that among the dead was the leader of an al Qaeda offshoot which had declared its loyalty to the Islamic State militant group.

The ministry said late on Tuesday the army had killed 22 of the group in Bouira province, a region that was an Islamist militant stronghold during a 1990s war that left 200,000 people dead.

Both al Qaeda in the Islamic Maghreb and Islamic State operate in pockets of Algeria, mostly in mountainous northern areas, but attacks have been rare since the war with Islamist armed groups subsided in 2000.

The military has given no details or mentioned the affiliation of the jihadists involved, just calling them "terrorists", which is the Algerian armed forces' general term for Islamist armed groups.

Security sources said the strike was against members of the Caliphate Soldiers, an al Qaeda splinter faction that had declared allegiance to Islamic State militants who control territory in Iraq and Syria.

Among the 25 killed was the leader of the faction, Athmane al-Assimi, who replaced Gouri Abdelmalek, the commander who was killed in December 2014 in the region of Boumerdes, one security source said.

The operation was launched by Algerian intelligence about 10 days ago when it pursued a gunman who had met with other members, the security source told Reuters asking not to be identified because he was not authorised to speak to the media.

"The Caliphate Soldiers terrorist group is obviously on the decline, it has lost most of its members in the past six months, this is a major achievement for the army," the source said.

Last September, the Caliphate Soldiers kidnapped and killed a French tourist in the mountains east of Algiers. Since then, Algerian security forces have carried out increased security operations in the area.

Algeria, an OPEC member and major gas supplier to Europe, has become a key partner in the Western campaign against Islamist insurgencies across North Africa and the Sahel region, sharing intelligence and expertise with neighbours like Tunisia. (Reporting by Lamine Chikhi; Writing by Patrick Markey; Editing by Dominic Evans)