* Kerry wants Machar and Kiir to talk face to face
* Bentiu scene of ethnic massacre last month
* Both sides to contemplate "month of tranquillity" (Recasts with Kerry's comments, progress in peace talks)
By Andrew Green and Phil Stewart
JUBA/LUANDA, May 5 U.S. Secretary of State John Kerry threatened sanctions against South Sudan rebel leader Riek Machar on Monday if he spurned peace negotiations, as government forces battled for control of the northern oil town of Bentiu.
Kerry flew to South Sudan on Friday to revive talks that have made scant progress in months. He secured a commitment from President Salva Kiir to fly to Ethiopia for face-to-face talks with Machar, who held off from promising to take part.
In a rare sign of progress in talks dogged by deep mutual mistrust, government and rebel negotiators in Ethiopia's capital said they had agreed to consider a "month of tranquillity", to start on Monday, and recommitted themselves to opening aid corridors.
Machar told the Sudan Tribune on Saturday he thought a face-to-face meeting with Kiir could be "counter-productive". But Kerry, who said he had read the interview, noted that Machar had not ruled out meeting his rival.
"He has a fundamental decision to make. If he decides not to and procrastinates, then we have a number of different options that are available to us," Kerry told reporters in Angola on the last stop of a nearly week-long trip to Africa.
The conflict erupted in mid-December after long political rivalry between Kiir and Machar, whom Kiir sacked as his deputy in July. The unrest has exacerbated tensions between their ethnic groups - Kiir's Dinka people and Machar's Nuer.
On Monday, the army and rebels both claimed control of Bentiu after two days of heavy fighting in the town, scene of an ethnic massacre last month which heightened fears of genocide in the world's newest nation.
"MONTH OF TRANQUILLITY"
Government forces overran fighters loyal to Machar on Sunday but the rebels launched a counter-offensive early on Monday. A military spokesman said the army had fended off the attack, but rebels said they had driven SPLA soldiers out of the town.
"There will be fighting around Bentiu. The SPLA is trying to establish full control over Unity state and that will take some time," SPLA spokesman Colonel Philip Aguer told Reuters before negotiators agreed to consider a month of tranquillity.
Under the terms of the deal signed in Addis Ababa, the two sides would consider beginning such a truce on Monday, to allow civilians to move to places of safety and plant crops.
It was not clear when precisely a truce might come into effect, or when the sides might finalise agreement on it.
South Sudan's outgoing army chief General James Hoth Mai accused neighbour and old foe Sudan on Monday of arming the rebels fighting his troops - an allegation quickly dismissed by Khartoum.
Thousands of people have been killed and more than a million forced from their homes since the violence erupted four months ago, prompting the United Nations to warn of a possible famine in parts of the country, which is about the size of France or Texas.
Peace talks brokered by the regional IGAD grouping have gone nowhere since a January ceasefire deal which never took hold.
"We would have wished to sign today the entire agreement recommitting the parties to observing the whole cessation of hostilities agreement," said Nhial Deng Nhial, head of the South Sudan government delegation in Ethiopia.
Taban Deng Gai, his counterpart from the rebel camp, said the accord was encouraging.
Kerry's visit to Juba, his first as Washington's most senior diplomat, was part of a renewed diplomatic push to end a conflict increasingly being fought along ethnic lines.
Fears of a descent into genocide grew after the United Nations said rebels had massacred hundreds of civilians in Bentiu last month. Days later, residents of Bor, a predominantly Dinka town, attacked Nuer camped in a U.N. base.
Oil output, South Sudan's economic lifeline, has been cut by a third to about 160,000 barrels per day since fighting began.
Oil firms operating in South Sudan include China National Petroleum Corp, India's ONGC Videsh and Malaysia's Petronas. (Additional reporting by Shrikesh Laxmidas in Launda and Aaron Maasho in Addis Ababa; Writing by Richard Lough; Editing by Edmund Blair and Andrew Roche)