ADDIS ABABA, Sept 11 (Reuters) - New Year festivities in Ethiopia were tinged with fears on Friday that fresh fighting could erupt on the border with Eritrea now that the long rainy season is coming to an end.

``Enqwutatash'' or New Year's Day marks the first day of spring in the Ethiopia's 13-month calender and is traditionally celebrated with torch-light processions, singing and gifts.

In the countryside the floors of peasant houses are strewn with freshly cut grass and families slaughter a sheep or a chicken for their evening feast.

But Ethiopians are aware that the end of the rains also clears the way for new military manoeuvres and a possible resumption fighting in the country's unresolved border dispute with its northern neighbour Eritrea.

`Defending sovereignty, territorial integrity of Ethiopia major task in 1991,'' read Friday's headline in the English-language Ethiopian Herald -- referring to the new year in the Ethiopian calender which lags behind dates elsewhere.

"I think they will start fighting again,'' said a taxi driver in the capital Addis Ababa. ``There are many soldiers and militia there (at the border). We have not yet found peace.''

The conflict between the former Horn of Africa allies broke out in early May after both sides accused each other of incursions around the northwestern border town of Badme.

Hand-to-hand and artillery battles on three fronts spread to tit-for-tat air strikes and hundreds were killed before fighting subsided in mid-June.

Despite intense peace efforts by the Organisation of African Unity (OAU) the issues underlying the conflict remain. Ethiopia says Eritrean troops still occupy its territory and Prime Minister Meles Zenawi refuses to enter face-to-face negotiations with Eritrean President Isayas Afewerki until these forces are withdrawn to positions held before May. Afewerki proposes direct talks with Meles and wants international monitors put in place.

Diplomats in the region say a heavy build up of troops and weapons on both sides of the border in recent weeks could signal the worst.

"These are two very stubborn countries,'' said one Western defence expert based in Addis Ababa. ``And I don't think the attitudes of either party has changed. There are more troops there now than when they were fighting and all the activities suggest they are preparing for an armed resolution.''

After a peace initiative brokered by the United States and Rwanda broke down in June, mediation efforts have been led by the OAU, which is also trying to broker a ceasefire in the Democratic Republic of the Congo.

``The OAU is really stretched at the moment,'' a diplomat said. ``It is desperately trying to find a way round this conflict but at the same time its eyes are elsewhere.''

The OAU has scored at least a partial success by containing for three months a conflict that neither side appears to want or can afford, diplomats said, but a major breakthrough is still elusive.

The border has been ill-defined since Eritrea gained independence from Ethiopia by friendly agreement in 1993. Officials have trawled through colonial maps and treaties to try and determine who actually holds claim to the scrubby triangle of land under dispute, but theirinvestigation was inconclusive.

``This dispute isn't about lines on a map, it's about the pride of two extremely proud countries,'' a Western diplomat said. ``The only way to resolve is now is through face-saving measures, and nobody seems to have come up with any that work.''

Meanwhile, both sides have taken advantage of the rainy season to reinforce their ground and air military and map out battle strategies, diplomats said. Independent newspapers in Ethiopia report that hundreds of army and airforce veterans have been recalled to the military.

On paper at least, Ethiopia has superior military might, but the Eritreans showed themselves ingenious and determined fighters in the long guerrilla war in which they fought alongside Ethiopian rebels to bring down the Marxist regime of Mengistu Haile Mariam in 1991.