A Chechen official is reported as saying 118 are dead and up to 400 wounded.

Correspondents said the strikes at 1815 local time (1415 GMT) appeared to be targeted at the presidential palace, situated only yards away.

They say Russia appears to be stepping up its military campaign against Chechen separatists.

But the Russian Defence Ministry in Moscow "categorically denied" that Russian forces were responsible for the blast.

BBC's Jonathan Charles assesses the tactics of the Russian army

A Reuters reporter, Maria Eismont, said she saw multiple casualties at the city hospital.

"It was packed with corpses," she added. "There were women, children - at least 30. There are so many corpses and injured. Every minute they are bringing more and more."

A correspondent for the French news agency, AFP, counted 27 dead at the maternity hospital. He said most were women and new-born babies.

He said 17 bodies had been recovered from the market.

President Aslan Maskhadov was not in the palace at the time of the attack.

Russians closing in

Russian forces were earlier reported to be closing in on the city, three weeks after they entered the breakaway republic with the aim of eliminating Chechen rebel fighters.

The BBC's Angus Roxburgh: "A risky invasion plan is being drawn up."

But the Interfax news agency said the Russian defence ministry "denied the Chechen side's claims about federal forces inflicting a missile strike on the centre of Grozny".

The attack threw the city into panic, and streets were jammed with traffic as residents attempted to flee.

A surgeon cuts clothes from a wounded Russian soldier

Five explosions were reported, including one in an outlying suburb.

Russian forces began an air bombardment of Chechnya on 5 September. Officials have said that strikes against rebel bases are being carried out with pinpoint accuracy, but correspondents say attacks on villages have caused widespread civilian casualties.

Russia said earlier that its forces had moved to within 12km (7.5 miles) of Grozny, and were forming a defensive ring around it, which would gradually be tightened.

The BBC's Angus Roxburgh, who has just returned from the region, says Russian Prime Minister Vladimir Putin gave a strong indication that ground troops would attack the capital once bombing raids had caused civilians to flee.

Mr Putin visited the front line on Wednesday. On Thursday, he arrived in Helsinki, where European leaders were expected to urge a peaceful solution to the war at an EU-Russia summit on Friday.

Chechen sources said Russian troops could now be seen with binoculars from the capital's northern outskirts.

Troops have so far been approaching from the north, west and east.

Click here to see a map of the area

Chechen commanders have said they are bracing for a fight and have vowed to defeat the Russians if they send ground troops into Grozny. The city was the scene of a humiliating defeat for Russian forces on 1 January 1995.

Winter worries

A Russian commander on the western front was quoted as saying that the Russian troops needed to occupy large towns before the winter.

The BBC's Angus Roxburgh: "It looks like a major new push has begun"

"We cannot spend the winter in the open ground and on hilltops," he said.

Moscow blames Chechen militants for a series of apartment block bombings which killed nearly 300 people, as well as two incursions into neighbouring Dagestan.

Mr Putin visited the front line this week

Mr Putin has seen his popularity soar since the military operation began.

The United States has told Russia that it is concerned about reports of heavy civilian casualties and the growing number of refugees in the region.

According to figures from Russia's Ministry of Emergencies more than 177,000 people have fled Chechnya to escape the fighting, often without winter clothes, money or food.