Two Kosovo Albanian civilians were also killed and a third is in a stable condition in hospital.

BBC Correspondent Paul Wood - reporting from the scene - says the blast appears to have been caused by the remains of a Nato cluster bomb.

Kate Adie reports: "The explosion left two Gurkhas dead"

The soldiers - Gurkhas from Nepal serving with the Royal Engineers - were clearing munitions from a school in the town of Orlate on the edge of the British sector.

Local people say that some 50 separate pieces of unexploded ordnance were collected by the British explosives experts, being guided by local KLA fighters.

One of the explosives is said to have gone off at 1325 GMT, leaving a large crater.

The deaths came as President Clinton made it clear that Serbia would get no funds to rebuild its infrastructure while Slobodan Milosevic remained in power in Yugoslavia.

Speaking in Bonn after talks with Germany's Chancellor Schröder, and with the outgoing President of the European Commission, Jacques Santer, Mr Clinton said the rebuilding of the Balkans would be very costly but cheaper than continuing the war over Kosovo.

But he made it clear that Europe would be expected to provide the bulk of the funds.

Although hospitals and aid organisations would get financial help, damage caused by Nato bombs would not be put right until the Serbian leader stepped down.

A donors meeting will be held in July to discuss immediate reconstruction plans for Kosovo, with another session in the autumn to consider longer term plans for the region.

Danger brought into sharp focus

Paul Wood reports: "Parts of Nato bombs on either side of the road"

A British military spokesman said Monday's fatal bomb blast highlighted the continuing dangers posed for both the K-For peacekeeping troops and returning refugees.

(Click here to see a map showing how refugees are returning home.)

"Troops already take all possible precautions but the nature of military operations inevitably involves dangers," said Lieutenant Colonel Nick Clissett.

"This tragic accident outlines the dangers to K-For troops, who are working to create a safe and secure environment for the return of the displaced people of Kosovo."

UK Prime Minister Tony Blair pays tribute to the soldiers' bravery

The UK Prime Minister, Tony Blair, has expressed his condolences to the families of the soldiers.

He said they had been clearing a large ammunition dump in the school.

Challenges ahead

After taking full control of the province from Serb forces on Sunday, K-For faces the difficult job of making the province safe for both Serbs and Albanians.

Ben Brown reports: "The priority for many is searching for missing loved ones"

The international medical charity, Medecins Sans Frontieres, has warned of a massive rise in casualties from unexploded mines as more Kosovo Albanian refugees return.

MSF says one of the most recent casualties was a 13-year old girl who ran into her garden, setting off a mine which blew off both her legs.

It says many Albanian homes have been booby-trapped by the departing Serb forces.

But K-For says it does not have the resources to check private houses and gardens for landmines.

BBC correspondents say the peacekeepers also seem unable to prevent Kosovo Albanians from looting and burning down the homes of Serbs who have fled.

Since Kosovo Albanian refugees began returning to the province last weekend, up to 50,000 Serb civilians have fled, fearing reprisals.

• Clinton calls shots over aid
• Kosovo rebels to disarm
• Montenegro stands up to Serbia
• Sleeping with the enemy
• Rebuilding the Balkans: Who pays?