Western diplomats confirmed that around 100 Serbian tanks and armoured vehicles had been involved in an offensive against ethnic Albanians on Thursday in the Podujevo region of northern Kosovo.

BBC Balkans Correspondent Paul Wood: The KLA ceasefire was always tactical

According to a statement from the KLA General Staff, "under these circumstances our self-restraint policy no longer has meaning. This can be understood as the end of the policy of ceasefire."

Nato Secretary-General Javier Solana said Nato's activation order on Yugoslavia remains in place, which would allow Nato to conduct military operations against Yugoslavia "if the situation deteriorates further".

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

"We will follow very closely how the situation evolves," Mr Solana said, adding that Yugoslav President Slobodan Milosevic must keep to his promises regarding the deployment of soldiers and police in the province.

But diplomats are already saying the latest offensive probably puts Belgrade in breach of UN resolutions on Kosovo.

Appeal for diplomacy

Mr Solana described the KLA's cancellation of its ceasefire as "a trememdous mistake".

"I would like to ... make a clear appeal to both sides to comply with ceasefire that they had agreed and continue towards the only solution ... which is the political solution."

In October this year President Milosevic signed a peace deal negotiated by US envoy Richard Holbrooke under the threat of Nato air strikes. The deal placed restrictions on Serbian police and military operations in the province.

Javier Solana: Activation order still in place

The KLA was never a signatory to this deal, and it never abandoned the armed struggle in pursuit of an independent Kosovo, where 90% of the people are ethnic Albanian. The rebel army declared a unilateral ceasefire, but retained the right to fire if fired upon.

Recently, Serbian officials have warned Western diplomats that they were not prepared to stand by as KLA fighters moved into positions vacated by the security forces as part of the peace agreement.

Our Balkan correspondent says the consequences are serious for the international monitors, who are just beginning their work in Kosovo as part of the implementation of the peace programme.

Shelled villages

In the latest fighting, Western diplomats confirmed on Thursday that the Serbs had shelled several villages near Podujevo.

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

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

The KLA reported that civilians had come under fire and refugees had fled the area.

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.

KLA counterstrike

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

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.