Western diplomats say several villages have been shelled near the northern town of Podujevo.

Ethnic Albanian sources said the Serbs had set fire to houses, killing at least one person.

The Kosovo Liberation Army reported that civilians had come under fire and refugees had fled the area.

But the rebel fighters said they had also destroyed seven tanks and 12 armoured vehicles and inflicted numerous casualties.

There is no independent confirmation of this, but a BBC correspondent says the KLA is known to have been importing sophisticated anti-tank weaponry in recent months.

The Organisation for Security and Co-operation in Europe, which is monitoring the ceasefire in the province, said Serbian tanks and troops headed north out of the provincial capital, Pristina, in the morning.

But a spokesman said the fighting had died down by the evening.

Serb threat

A Western diplomatic source confirmed that around 100 Serbian tanks and armoured vehicles had been involved in the offensive.

He said the Yugoslavs had warned last week that if the KLA continued to fortify new positions, they would answer with force.

The BBC's Paul Wood: KLA sources say civilians have been fired on

The Serbian authorities said they were only carrying out a limited search operation after the killing of a policeman on Monday.

The Kosovo Information Centre, close to the province's ethnic Albanian leadership, said Serb tanks had entered one of the villages, Lapastica, a stronghold of the KLA which is fighting for independence from Serbia.

OSCE spokesman Jurgen Grunnet: There are reports of shelling and machine gun fire

"This offensive confirms our worst fears that the Serbian regime planned to use the Christmas holidays to launch an action aimed at ethnically cleansing the north of Kosovo," said Xemail Mustafa, a spokesman for the province's ethnic Albanian leaders.

Mr Mustafa urged American and European governments and the international monitors sent to the province to verify the ceasefire agreement to intervene.

Nato warning

On Wednesday, two top Nato officials warned both sides in the separatist province against launching more attacks.

The alliance's supreme commander, General Wesley Clark, complained of "increasingly aggressive Serb military and police activities".

He says Nato is watching closely to ensure Yugoslav President Slobodan Milosevic keeps his promises under the October agreement reached with US envoy Richard Holbrooke to halt the bloodshed.

Nato Secretary-General Javier Solana echoed those concerns, saying escalating violence and killings in recent days "pose a grave risk to the ceasefire".

"We remain fully vigilant and ready to act," he added.

During the eight-month war between secessionist ethnic Albanians and Serb security forces 1,000 people were killed and another 300,000 lost their homes.