The Security, Immigration and Refugee Affairs Authority said in a statement on Saturday that it had finalised preparations to grant residence permits to Eritrean citizens living in Ethiopia.

Eritrea, formerly part of Ethiopia, became independent in 1993 with Ethiopian agreement. Relations between the two Horn of Africa countries deteriorated when fighting broke out over disputed parts of their 1,000-km (600-mile) border in May last year.

Eritrea recently announced that it had accepted an Organisation of African Unity (OAU) proposal to restore peace, but Ethiopia says it is seeking clarification on some aspects of the peace plan and relations remain tense.

The weekend announcement from Addis Ababa said every Eritrean aged 18 and above who had either taken part in the 1992 referendum which produced a vote for Eritrean independence or had acquired Eritrean citizenship, must register.

The Eritrean Embassy in Addis Ababa says 130,000 Eritreans living in Ethiopia participated in the referendum.

Ethiopian law requires all foreigners residing in Ethiopia to obtain residence permits, but officials said this provision had not, until now, been enforced for Eritreans.

About 300 rebels from the Oromo Liberation Front (OLF), who locals say arrived in the region recently after they were forced out of their bases in Somalia by the Ethiopian army, have been spotted in the Malaba hills of northern Kenya, officials said.

``The military is closing in on the rebels' hideout,'' Fred Mutsami, commissioner of the local district of Wajir, told Reuters by telephone from Wajir town.

The OLF, which says it represents the interests of Ethiopia's Oromo ethnic group, has stepped up its rebellion in eastern Ethiopia in recent months.

Ethiopia's government said on Thursday it had killed 746 OLF and allied rebels in clashes in eastern

The Defence Ministry said in a statement that Eritrea's actions showed its lack of commitment to an Organisation of African Unity (OAU) peace plan for ending the border war between the Horn of Africa nations.

Eritrea angrily denied the accusations, saying it did not support either the OLF or any other extremist group.

``This accusation is a red herring because the TPLF (Ethiopian government) is cornered by the peace process,'' said Eritrean government spokesman Yemane Gebremeskel.

``Eritrea has for several years been at the forefront in the fight against extremism in the region. Now Ethiopia says we support extremist groups. The allegation is simply preposterous,'' Gebremeskel added.

On Wednesday, the Oromo Liberation Front (OLF), a shadowy rebel group, said it had killed 107 government soldiers and wounded 95 in a series of offensives in the south of the country this month.

A similar report from the OLF last month that it had killed 519 enemy soldiers was dismissed by Ethiopia's government as ``pure fabrication'' and met with a denial that any fighting had taken place.

But on Thursday the Defence Ministry responded by saying it had the upper hand in fighting against the OLF and the Islamic fundamentalist Al Ithad rebel group.

``The National Army killed 746 and captured 357 Oromo Liberation Front and Al Ithad terrorists who have been armed by the dictatorial Eritrean regime to carry out subversive activities in eastern Ethiopia between May 26 to August 10,'' it said.

Ethiopia and Eritrea have been locked in a border war since May last year in which tens of thousands of soldiers are thought to have died.

Hopes of a peaceful resolution were raised last month when both sides said they accepted an OAU peace plan in principle. Negotiations followed under Algerian mediation to work out the details of a ceasefire and peace accord.