ZALAMBESSA, Eritrea/Ethiopia border, Sept 24 (Reuters) - Life goes on in the town on the disputed border between Ethiopia and Eritrea - despite the crackle of Kalashnikov rifles on a nearby firing range and the distant boom of artillery.

Belts, laces and polish are displayed in stores alongside biscuits vegetables and spices. A few bars have reopened.

These days the customers in Zalambessa are soldiers -- ensuring the livelihoods of the few shopkeepers who remain.

Zalambessa was one of the main stages where the now dormant conflict between the two Horn of Africa nations was played out, and it was the scene of intense artillery exchanges in June.

Most residents fled, and despite three months of relative peace, few civilians have returned to the Eritrean-held town, fearing a fresh round of fighting now that the long rainy season has come to an end.

The presence of Eritrean soldiers has proved to be a lifeline to some who have returned to try to revive their abandoned businesses.

``Most of the people who lived here left, but the army buy many goods instead,'' said shopkeeper Sara Beyene.

Ethiopian Kidane Girmai was another shopkeeper who had decided to reopen his business.

``Business is good,'' he told a Reuters correspondent visiting the town. ``I like to come to the shop because people come, buy things and talk to me. I have no problem with the people here, I only worry about the shelling.''

His eight children were in the Ethiopian capital Addis Ababa, he said, but he wanted them to return.

``I am Ethiopian but all I care about is that this problem is settled peacefully. I always worry if I will die today or tomorrow if there is shelling, or in the next days the war could happen.''

To the south of the town in an underground camouflaged bunker, soldiers, both men and women, sat and talked, while another got on with the platoon's paperwork, writing in new exercise books.

``I hope they can peacefully finish it soon,'' said Abraham Berhe, a student doing national service who was mobilised in April. ``I don't want to fight again but I will if they attack. I wish it would be over.''

One soldier began to play a traditional lyre, or krah, while the rest of the platoon drank sweet tea and laughed at his improvised lyrics -- ``the Ethiopians have lit a fire, that is out of control, now they will be lost in the fire,'' he sang.

The conflict between Ethiopia and Eritrea erupted on May 6, with both sides accusing each other of invading.

Fighting spread to three fronts and while there have been no reports of significant engagements since mid-June, a peace initiative by the Organisation of African Unity (OAU) has so far failed to find a negotiated solution.

Eritrea has expressed reservations about a planned visit to both countries by former U.S. national security adviser Anthony Lake to seek a peaceful resolution to the conflict.

In a statement released on Saturday, Eritrea said President Isayas Afewerki was prepared to meet the envoy despite what it said was unhelpful previous interference by the U.S. over the dispute.

Eritrea rejected a four point plan by the U.S. and Rwanda under which it would have had to withdraw to territory it held before May 6.

The plan, accepted by Ethiopia, formed the basis first of an OAU initiative and figured implicitly in a resolution by the U.N. Security Council.

Eritrea has proposed face-to-face talks between the two leaders as well as international monitoring of the border while the question of original ownership was established.

Diplomats in Asmara said they feared a resumption of hostilities was inevitable, with an estimated half a million troops mobilised on both sides of the border.

``This is going to be the biggest conventional war in Africa,'' said one. ``This is not about small forces, but about two well-armed countries fighting on three defended fronts.''

Under blue skies at a sandbagged watch-post near Zalambessa, Eritrean soldiers sat and monitored Ethiopian positions.

``I don't know when the war will start, but we know they are well-prepared in Adigrat (on the Ethiopian side of the border),'' said a Eritrean colonel who declined to be identified. ``It is up to them, but we are ready.''