Two peace monitors, one of them British, have been shot and wounded during the clashes.

It is the first such incident involving peace monitors from the Organisation for Peace and Security in Europe (OSCE). The monitoring group says it is not clear whther the two men were directly targeted or were caught in the crossfire.

An OSCE spokesperson said neither men's injureis were life-threatening.

International monitors say the renewed fighting is taking place in Racak and two other villages near Stimlje, about 25 km (16 miles) south of the provincial capital, Pristina.

Witnesses have reported hearing heavy bursts of gunfire and explosions in the area.

Albanian sources say the Serbs bombarded villages with artillery fire, killing six people. There has been no independent confirmation of the deaths.

The Serbian police said they have sealed off the village of Racak, while searching for what they called members of a "terrorist group".

The police say the group attacked a police patrol on Sunday and is also allegedly responsible for killing seven pro-government ethnic Albanians in the region.

Serb forces: Fears for 'widespread fighting'

There has been a build-up of Serb forces in the region after tensions following the seizure of Yugoslav soldiers by rebels. The soldiers were released on Wednesday.

The supreme Nato military commander, General Wesley Clarke, said he was "very concerned about the situation in Kosovo".

"There is a strong possibility, absent diplomatic agreement or some implicit understanding in the next six to eight weeks, that we will see resumption of very widescale fighting," General Clarke said in Sarajevo, Bosnia.

"As we look towards the spring what we see is a continuing risk that conflict will return to unacceptably high levels," Mr Clarke said.

Moderate ethnic Albanian leader Ibrahim Rugova has also called for an end to the violence.

Mr Rugova said preparations were underway for a meeting of all "political forces and institutions in Kosovo" to forge a common stand in preparations for talks with the government on the future of the province.

The Organisation for Security and Co-operation in Europe (OSCE) is trying to organise a meeting of the ethnic Albanian factions in Vienna, Austria, to prepare for talks with the Belgrade government.

KLA demands hostage deal

Earlier, the Kosovo Liberation Army (KLA) said it received guarantees that nine Albanians captured by the Serbs on 13 December will be freed, and wants Serbia to fulfil the agreement.

Negotiations: The OSCE meet the KLA earlier in the week

Ethnic Albanian media reported that the release was promised as part of a deal in which eight Yugoslav soldiers captured by the KLA were freed.

"We decided to free them after receiving guarantees that the United States on one side and the European community on the other would press for the freeing of Albanian political prisoners," Bardhyl Mahmuti, a Switzerland-based representative of the KLA told reporters.

"We received guarantees that the Belgrade authorities will release to start with the nine Albanian prisoners who were arrested near the border," Mr Mahmuti added.

Yugoslav authorities insisted the release of the Serb soldiers was unconditional.

The eight Yugoslav soldiers were freed after more than five days of talks led by a senior OSCE official, William Walker.