* Police and army use brutal force, rights group says
* HRW says income funnelled to Mugabe party officials
* Minister says reports of killings false
By Tiisetso Motsoeneng
JOHANNESBURG, June 26 (Reuters) - Zimbabwean police and army are using brutal methods to control diamond fields, forcing children and adults to work and beating local villagers, Human Rights Watch (HRW) said on Friday.
In a report on Zimbabwe's Marange diamond fields, it said the military, which remains under the control of President Robert Mugabe's ZANU-PF under a power-sharing deal, killed more than 200 people in a takeover of the fields in late 2008.
"The police and army have turned this peaceful area into a nightmare of lawlessness and horrific violence," said Georgette Gagnon, Africa director at Human Rights Watch. "Zimbabwe's new government should get the army out of the fields, put a stop to the abuse, and prosecute those responsible."
Mugabe's unity government with Prime Minister Morgan Tsvangirai is under pressure to create a democracy and improve Zimbabwe's human rights record to get billions of dollars from Western donors demanding political and economic reforms.
The new administration says it needs $10 billion to rebuild a shattered economy and win the confidence of millions of Zimbabweans who have faced years of bare hospitals, potholed streets and staggering unemployment.
But foreign investors and donors are likely to remain cautious for months, if not years, piling pressure on old foes Mugabe and Tsvangirai to work together and enact reforms, including greater government transparency.
"Some income from the fields has been funnelled to high-level party members of ZANU-PF, which is now part of a power-sharing government that urgently needs revenue as the country faces a dire economic crisis," the report said.
Zimbabwe's Deputy Mines and Mining Development Minister Murisi Zwizwai told a business seminar that reports of killings in Marange were false and "contrary to allegations, nobody was killed by security".
Industry experts say legal diamond output and sales account for less than 10 percent of Zimbabwe's mining earnings, but have potential to join gold and platinum among country's big earners if the government clamps down on smuggling.
Foreign investors are looking anew at mining opportunities mineral-producing Zimbabwe, especially deposits of platinum, gold and diamonds. While some have ventured back, others are waiting for the legal framework to be strengthened.
Human Rights Watch said it based its findings on more than 100 one-on-one interviews with witnesses, local miners, police officers, soldiers, local community leaders, victims and relatives, medical staff, human rights lawyers, and activists in Harare, Mutare, and Marange district in eastern Zimbabwe.
"Those interviewed said that police officers, who were deployed in the fields from November 2006 to October 2008 to end illicit diamond smuggling, were in fact responsible for serious abuses -- killings, torture, beatings, and harassment -- often by so-called 'reaction teams', which drove out illegal miners," it said. (Writing by Michael Georgy)