DJIBOUTI, Nov 11, 1998 (Reuters) - Djibouti demanded an apology from its neighbour Eritrea on Wednesday after Eritrea accused it of ferrying war supplies to neighbouring Ethiopia.

Djibouti is one of three nations trying to mediate the border conflict between Eritrea and Ethiopia, but Eritrea last week asked it to withdraw from the mediation team.

Djibouti ``is now demanding an official apology (from Eritrea),'' Djibouti's Foreign Minister Mohamed Moussa Chehem told state television late on Tuesday.

The Djibouti army says it has stepped up surveillance of the border with Eritrea in the northwest, and residents of the capital were bracing themselves on Wednesday for a possible military clash, according to witnesses.

Most of Ethiopia's imports and exports have been channelled through the port of Djibouti since its conflict began with Eritrea. In the past, the landlocked Horn of Africa country used the Eritrean ports of Assab and Massawa.

Kidane Woldeyesus, first secretary at the Eritrean embassy in Nairobi, said his country had evidence Djibouti was helping the Ethiopian war effort.

``We have material evidence that Djibouti has turned into a conduit for war materials for Ethiopia,'' he told Reuters.

``We are calling for them to pull out of the peace talks because we have material evidence. There is no reason for us to apologise.''

Chehem said Eritrea's demand was ``a deliberate provocation'' and added that Djibouti was determined to stay on the team.

``As President (Isayas) Afewerki is having domestic problems he has decided to handle them by distracting his own people and picking on Djibouti as Eritrea's new enemy,'' Chehem said.

Hundreds died in May and June in the war between Ethiopia and Eritrea. The conflict has since cooled but both sides continue to reinforce border positions.

The mediation team, which comprises the presidents of Djibouti, Zimbabwe and Burkina Faso, held a summit last weekend in Burkina Faso with Isayas and Ethiopian Prime Minister Meles Zenawi, but failed to bridge the gap between the two countries.

Relations between the two Horn of Africa nations were strained in April 1996 after Djibouti rejected an Eritrean border map, which it said ceded a strip of its territory to Eritrea.