* African minister make first major peace initiative
* Crowd raids U.N. base where locals were sheltering
* Kiir says ready to talk, rival says wants him to quit
* Fighting has reached vital oil fields (Adds comments from Ethiopian minister on peace effort)
By Carl Odera
JUBA, Dec 20 (Reuters) - African mediators said they held productive talks on Friday with South Sudan's President Salva Kiir as they seek to prevent an almost week-long conflict plunging Africa's newest nation into a civil war along ethnic faultlines.
The United Nations said on Thursday a crowd of Nuer tribesmen breached a U.N. compound in Jonglei State north of the capital and had reports that some locals sheltering there were killed. It also said two Indian peacekeepers died.
Kiir, a member of the Dinka ethnic group, has accused his former Vice President Riek Machar, a Nuer who was sacked in July, of attempting to seize power by force.
Fighting that began on Sunday in the capital Juba has swiftly spread, fuelled by ethnic loyalties.
Kiir has said he is ready for dialogue. Machar told French radio that he was ready to "negotiate his departure from power" and said the army could force Kiir out if he did not quit.
"We had a very productive meeting with his excellency President Salva Kiir and we will continue consultations," Ethiopian Foreign Minister Tedros Adhanom, who is leading African delegation, told reporters before returning to talks.
The team included ministers from Kenya, Uganda, Djibouti and Somali, and African Union and United Nations representatives. It is the first peace initiative since clashes erupted.
The U.N. Security Council meets on Friday to discuss South Sudan and to hear a briefing from deputy peacekeeping chief Edmond Mulet.
"President Kiir has always said that he doesn't want his people to turn back again to war," Foreign Minister Barnaba Marial Benjamin told Reuters. "That is why the government has been negotiating with a lot of militia groups."
The fighting worries neighbouring states, who fear new instability in a volatile region of the continent. It threatens the halting steps towards creating a functioning state that declared independence from Sudan in 2011 after decades of war.
Fighting has spread to vital oil areas. Soldiers from the rival factions clashed at a barracks near the town of Bentiu, capital of the oil producing Unity State.
South Sudanese officials have said till now that oil production, which had stood at about 245,000 barrels per day and provides most of South Sudan's revenues, have not been affected.
A source in Sudan, which hosts the sole export pipeline, said on Friday there had been no disruption.
But 200 oil workers have sought refuge in a U.N. base on Thursday. China National Petroleum Corp, one of the main operators, said it was flying 32 workers out of one field to Juba, according the Chinese state news agency Xinhua.
South Sudan's foreign minister and other officials have sought to play down the role of ethnic rifts, blaming political differences. But since fighting moved beyond the capital, clashes have been increasingly driven by ethnic loyalties.
"So we have a military coup in our hands which is causing a lot of instability in the country and is being played up in certain areas as if it is a racial ethnic war, which is not the case," Benjamin said.
"We don't want to encourage what happened in Rwanda," he said, referring to the 1994 genocide there.
The United Nations said on Tuesday it understood up to 500 people had been killed in clashes but has not given a death toll since then. It says about 34,000 people have fled to bases of the UNMISS peacekeeping mission since fighting started.
Clashes in Bor town, where Nuer in 1991 massacred Dinka, have fuelled the fears of an all-out ethnic war. Nuer commander and Machar ally, Peter Gadet, now controls Bor, officials said.
A U.N. official said Luo Nuer youths, from a sub-group of Machar's Nuer ethnic group, had assaulted the Akobo base in Jonglei, saying there were believed to be some deaths.
Presidential spokesman Ateny Wek Ateny told Reuters that 54 people from Kiir's Dinka ethnic group were killed by what he called Machar loyalists in the Akobo raid.
Political tensions between the two politicians had been mounting since Kiir, facing growing public frustration about the slow pace of development, sacked Machar.
The former vice president said he wanted to run for office and accused Kiir of acting like a dictator.
Speaking to France's RFI radio, Machar said that if Kiir did quit office: "I think the people will depose him, in particular, influential people in the army."
Before the fighting erupted, Kiir accused his rivals of reviving the kind of splits in the ranks of ruling SPLM party that led to led to bloodshed in 1991. But analysts said he had raised the stakes by branding initial clashes a coup attempt. (Additional reporting by Drazen Jorgic in Nairobi, Aizu Chen in Singapore, Maggie Fick in Cairo and Lou Charbonneau in New York, Writing by Edmund Blair, Editing by Angus MacSwan)