ADDIS ABABA, Oct 5 (Reuters) - Ethiopian President Negaso Gidada said on Monday that the main task facing the government was the liberation of territory occupied by neighbouring Eritrea -- by force if peace efforts failed.

``The armed forces of Ethiopia are...on full alert and in a state of preparedness,'' Negaso said in a speech to mark the opening of Ethiopia's current parliamentary session.

``The chance for a peaceful resolution to the conflict is dimming by the day and the likelihood of an outbreak of war is...imminent,'' he added.

Ethiopia and Eritrea have squabbled for years over disputed territory along their Horn of Africa border, but the dispute turned violent in May with each accusing the other of invading.

The Organisation of African Unity is currently finalising a report on territorial integrity that diplomats say will be used as basis for a renewed negotiated peace settlement.

Reviewing the country's economy, Negaso said Ethiopia had managed in a short period to attain self-sufficiency in food production.

The World Bank has forecast Ethiopia's food production will reach over 12 million tonnes in 1998/99, thanks to good rains and fertiliser supplies.

Ethiopia's annual food need is estimated at eight million tonnes, although production was limited to seven million tonnes last year due to the El Nino weather effect.

He said the other challenges for Ethiopia during the current year would be to exert efforts to improve the quality and quantity of the country's cash crops, such as coffee, and to boost foreign exchange earnings.