ADDIS ABABA, Jan 17 (Reuters) - Their armies are preparing for battle and their governments' propaganda machines are working at full throttle, but the ordinary people of Ethiopia and Eritrea do not relish the prospect of war.

"Ethiopians know what war is like," said one businessman in the northwestern Ethiopian town of Bahir Dar. "This is a problem between the two governments and they should resolve it."

A border dispute between the Horn of Africa neighbours exploded into war last year with hundreds of people killed in six weeks of artillery exchanges and aerial bombardments.

While the fighting died down quickly, Ethiopia and Eritrea have reinforced their positions along the 1,000-km (625-mile) border and have since engaged in a virulent war of words.

Diplomatic efforts to resolve the dispute are stalled, and local people say fighting could reignite at any moment.

MEDIA FOMENT ANGER

Both governments maintain they are committed to peace. Yet every day, the state-controlled media in both countries dish up a bitter diet of vitriol about the "enemy."

A commentary entitled "Perpetrators of Evil" in the weekly Eritrea Profile last month described Ethiopia's rulers as "more evil than Satan" for their deportation of thousands of Eritrean civilians from Ethiopia.

In Addis Ababa, the press is no less scathing-- even borrowing some of the vocabulary of the hated former regime of Mengistu Haile Mariam, which the current leaders of both countries fought long rebellions to topple.

The Ethiopian Herald last week dusted off a 10-year old article denigrating Eritrea's ruling front-- written in the Mengistu era. In it and other articles, Eritreans are referred to, disparagingly, as "Africa's Israelis."

In other papers, long pieces purporting to be readers' views, accuse Eritrea of killing Ethiopian civilians "in the tradition of fascists and Nazis."

But the press seems a poor guide to public opinion. With both countries accused by press watchdog Reporters Sans Frontieres of regularly violating freedom of speech, the lack of free debate is all too apparent.

"They do not consult the people," said the Bahir Dar businessman. "That is the problem."

FROM ALLIES TO ENEMIES

The governments of Ethiopia and Eritrea came to power in 1991, after working together-- despite periodic mistrust-- to oust Mengistu after a long and intensely costly civil war. Two years later Eritrea took independence from Ethiopia after a referendum.

The former allies are now enemies. But the people of Ethiopia and Eritrea see themselves as brothers, who often worked and lived together, and even belonged to the same families.

Those ties were crudely broken by the war as thousands were forced to give up businesses and sometimes families in their host countries to return to their country of birth.

Relations had soured after Eritrea introduced its own currency, the Nakfa, in November 1997, to replace the Ethiopian birr.

As economic rivalry intensified, Ethiopia responded by demanding cross-border trade be conducted in hard currency-- hitting Eritrea in the pocket.

BORDER DISPUTE TURNS VIOLENT

A long-running border disagreement, centering on a rocky 400 square km (150 square mile) patch of land called the Badme triangle, suddenly seemed to assume a greater importance.

Behind-the-scenes diplomacy failed to resolve the dispute about who owned the land, which was administered by Ethiopia. After a border skirmish on May 6, Eritrea invaded the contested territory on May 12.

The Organisation of African Unity has tried to broker a peace deal but Eritrea has rejected the OAU's demand that it withdraw to positions it held before the fighting started.

The Asmara government has instead called for international monitors to police the disputed border while ownership is established and for direct talks with the Ethiopian Prime Minister Meles Zenawi.

But Ethiopia rejects that proposal, saying it will not open talks until Eritrea pulls back its forces.

NATIONALISM TEMPERED BY WAR WEARINESS

Nationalist feeling is strong, and neither side wants to give in, but the people are also very weary of war.

"We have waited so long, the OAU has spoken, Eritrea has rejected its call. We have no alternative but to fight the war that has been imposed upon us," said one angry, young Ethiopian on the streets of Addis Ababa.

Eyon, a young, educated Asmaran on the other side of the lines said: "We may be married, or related, but our land is the most important issue. Too much blood was lost for this land, it is sacred."

But Meles, an office worker in Asmara, said people were fed up with the war. "They want it to end soon, one way or another."

Dawit, a soldier on leave in Asmara, said the cost of the war was widely known. "Every family in Eritrea has lost someone in the struggle (for independence) and now everyone has a relative or friend who is mobilised.

"We know it-- we hope the leaders and politicians remember it."

(Additional reporting by Alexander Last in Asmara)