Georgia, rebels cease fire, call talks

MEGVREKISI, Georgia (Reuters) - Georgian forces and separatists in breakaway South Ossetia ceased fighting on Thursday and called talks after days of heavy clashes raised fears of new war in the volatile Caucasus.

In a dramatic address, Georgian President Mikheil Saakashvili offered the separatists an immediate ceasefire.

Moscow said the two sides had agreed to talk at the Russian peacekeeping base in the separatist capital Tskhinvali on Friday.

Georgia's breakaway regions of South Ossetia and Abkhazia enjoy the political and financial backing of Russia but ex-Soviet Georgia has allied itself with the West and is pushing for membership of NATO. It lies at the heart of a region emerging as is a vital energy transit route.

Interfax quoted Russian peacekeeping commander Marat Kulakhmetov as saying that shelling, blamed by both sides on each other, had ceased. Kulakhmetov said the separatists and Tbilisi reached a deal.

A senior Georgian official said there had been no formal agreement but that the fighting had stopped.

The United States said it had agreed with Russia to work together to stop the fighting.

"I offer you an immediate ceasefire and the immediate beginning of talks," Saakashvili said in a televised address.

He said he had issued an order not to retaliate.

"It was a painful decision, but we have suffered casualties and villagers' homes have been damaged," he said.

Russian mediator Yuri Popov said the two sides would hold Moscow-mediated talks on Friday in Tskhinvali.

Fifteen years after South Ossetia and the Black Sea region of Abkhazia first fought to break away from Georgian rule, soaring tensions had raised the specter of full-blown conflict.

Explosions and gunfire could be heard on Thursday from villages around Tskhinvali, 100 km (60 miles) north of the Georgian capital Tbilisi towards the mountainous Russian border.

"UNPRECEDENTED DRAMA"

Two Georgian peacekeepers were killed and four wounded. A Georgian armored personnel carrier (APC) was destroyed in fighting around the Georgian-held village of Avnevi.

The separatists said two civilians were killed.

U.N. Secretary-General Ban Ki-moon called on the two sides to refrain from any action that could escalate the situation.

Saakashvili repeated an offer of full autonomy for the breakaway region. Russia could be the guarantor, he said.

An attempt at direct talks on Thursday never got off the ground. The two sides are at loggerheads over the format of negotiations, with Tbilisi pushing for direct talks with greater involvement of the West.

A security source said Georgian special police units and a mechanized army brigade had moved to Gori town on the doorstep of South Ossetia. A field hospital was set up on the main road and buses filled with Georgian soldiers stood in convoy.

Fitch's head of emerging European sovereigns, Edward Parker, told Reuters prolonged warfare could prompt the ratings agency to downgrade Georgia from its current BB-rating with stable outlook and impact foreign investment.

Russia said Georgia was readying for war.

"We urge the Georgian leadership to show common sense and stop irresponsible military activities in South Ossetia," Russia's Karasin told the Interfax news agency.

The fighting began at the weekend, when six people were killed. On Thursday, the official separatist website www.cominf.org said Georgians were shelling the village of Khetagurovo from Avnevi.

"Guns from APCs, mortars and machine-guns are being used," the site said.

Saakashvili rejected the Russian accusations.

"Confrontation is not in Georgia's interests and I hope and I'm sure that the continuation of confrontation is not in Russia's interests either," he told reporters.

EU foreign policy chief Javier Solana discussed the situation by telephone with Saakashvili, including the ceasefire offer.

"Solana expressed his serious concern about the situation in South Ossetia and called for every effort to be made to rapidly end the violence and resume peaceful talks between the sides," an EU statement said.

(Additional reporting by Matt Robinson in Tbilisi, James Kilner and Oleg Shchedrov in Moscow; writing by Matt Robinson; Editing by Angus MacSwan)