* Ceasefire deal last week raised hopes for peace
* Sectarian violence has driven more than 1 million from their homes
* Profiteering warlords will resist efforts at disarmament
* Any peace process will need to provide economic alternatives
By Daniel Flynn
NDASSIMA, Central African Republic, July 29 (Reuters) - Three young rebels, their AK47s propped against wooden stools in the afternoon heat, guard the entrance to the giant Ndassima goldmine carved deep into a forested hilltop in Central African Republic.
Sat in a thatched shack at the edge of a muddy shantytown, the gunmen keep the peace - for a price - among hundreds of illegal miners who swarm over the steep sides of the glittering open pit, scratching out a living.
The mine, owned by Canada's Axmin, was overrun by the mainly Muslim Seleka rebels more than year ago. It now forms part of an illicit economy driving sectarian conflict in one of Africa's most unstable countries, despite the presence of thousands of French and African peacekeepers.
Seleka fighters - many from neighbouring Chad and Sudan - swept south to topple President Francois Bozize in March last year. Months of killing and looting provoked vicious reprisals by Christian militia, known as "anti-balaka", that pushed the rebels back, splitting the landlocked country of 4.5 million people into a Muslim north and the Christian south.
"We control the mine. If there is a problem there, we intervene," said Seleka's local commander Colonel Oumar Garba, sipping tea outside a villa in Axmin's abandoned compound. "People don't want the French peacekeepers here because they know they'll chase them away from the mine."
Axmin suspended activity at the mine in late 2012 after rebels occupied its camp. The firm says it is monitoring the situation. CEO Lucy Yan did not respond to requests for comment.
Thousands of people have died and more than a million fled their homes in Central African Republic amid the violence between the Muslim Seleka rebels and Christian militia.
Scenes of cannibalism and the dismemberment of Muslims by Christian mobs in Bangui sowed fears of ethnic cleansing, prompting France to deploy 2,000 peacekeepers to its former colony. After tens of thousands of Muslims fled the south, the United Nations agreed to a 12,000-strong mission from September.
A ceasefire signed last week in the capital of neighbouring Congo Republic raised hopes of an end to the conflict. But many fear local warlords on both sides will resist attempts to break their grip over resources, especially diamond and gold mines.
At Ndassima, 60 km north of Seleka's military headquarters in the northern town of Bambari, sweat-soaked labourers toil beneath the gaze of Seleka gunmen to produce some 15 kilos of gold a month - worth roughly $350,000 on the local market, or double that in international trade.
Weighing gold on a balance in a hut at the foot of the mine, Jimmy Adoum says buyers are scarce but some pay their way past rebel checkpoints to carry gold to Bangui and east to Cameroon.
Further north, diamond fields around Bria and Sam Ouandja provide revenue for rebels, who extract protection money and sell diamonds to dealers in Sudan and Chad, experts say. From there, the gems are trafficked to Antwerp, Dubai or India.
"Commanders on both sides are profiteering from this conflict. Both the anti-balaka militia and Seleka are involved in gold and diamonds," Kasper Agger, field researcher for the Enough Project, a Washington-based think-tank. "If we are going to make peace, we need to offer them an economic alternative."
"JEALOUSY, NOT RELIGION"
Before Seleka seized power in March last year, Central African Republic ranked as the world's 12th largest diamond exporter. Thousands of artisanal miners produced more than 300,000 carats a year from thin alluvial deposits.
Much of the fiercest fighting centred on these deposits, especially in the west. In the mining town of Boda, nestling in forests 100 km west of Bangui, the anti-balaka militia have besieged thousands of Muslims in the market district.
French troops, their armoured personnel carriers aligned on an escarpment overlooking the town, now keep the two sides apart. Opposite the Muslim enclave stand ruins of Christian homes destroyed in fighting after Seleka withdrew in January.
Both sides accuse the other of starting the clashes. Christians have seized Muslims' mining equipment and cattle from nearby pastures. Some who venture from the Muslim enclave have been killed by militia, their bodies dumped in the river.
"If the Muslims stay there 40 years, we'll wait for them. We want to kill them," said Nicaise Wilikondi, 45, an ex-teacher who lives in a camp for displaced Christians.
Like elsewhere in Central African Republic, in Boda it was Muslim middlemen who controlled the diamond trade and reaped its profits, while most of the poorly paid mine labourers were Christians, fueling sectarian resentment.
Cherif Dahirou, Boda's main Muslim diamond trader, said the Christian militia had seized the nearby artisanal pits, but he refused to leave the town where he has lived for 38 years.
"This isn't about religion: it's jealousy," he said under an awning in the grounds of his large house in Boda, in the besieged Muslim enclave. Originally from Chad, he spoke in Arabic, not the local Sango language: "I know the anti-balaka commanders, Romeo and Malou: they used to work the mines."
The region west of Bangui is controlled by Christian militia leader Alfred Yekatom, a veteran soldier known as "Rombhot" after the movie hard man Rambo, who has profited from several uprisings. He collects thousands of dollars a week from roadblocks staffed by his fighters, according to U.N. experts.
In Boda, militia leader Habib Saidou, a former soldier loyal to Rombhot, said the Muslims would be left in peace provided that 14 people who controlled the diamond trade - including Dahirou and Mayor Mahamat Awal - left the town forever.
"Until then, the Muslims have to stay behind the red line. If they cross over, we're going to kill them."
"EVERYONE IS BUYING"
Since independence from France in 1960, Central African Republic has lurched between a series of coups and rebellions as politicians and warlords strove to exploit its resources.
In an attempt to prevent "blood diamonds" from funding this conflict, the Kimberley Process - a group of 81 countries, including all the major diamond producers - imposed an export ban on raw gems from Central African Republic last year.
Local trading houses like Sodiam and Badica are still buying gems to stockpile until the ban is lifted. The transitional government of President Catherine Samba Panza is trying to enforce a "traceability" scheme to show diamonds are not mined in rebel territory.
But with only a handful of officials in its anti-smuggling taskforce, her cash-strapped government has little prospect of curbing the traffic in gemstones.
"Everyone is still buying. Some people take it to Chad, then it goes to Dubai," said Saliou Issoufa, whose family works in the trade in Bambari. He said some Seleka leaders were directly involved in the trade - something corroborated by a U.N. report.
Seleka's two main factions have for years vied to control the diamond mines in the remote northeast. The Union of Democratic Forces for Unity (UFDR), made up of fighters from the Gula tribe, controlled Bria. The Convention of Patriots for Justice and Peace (CPJP), grouping Runga fighters, seized mines at Ndele.
Yet Roland Marchal, a researcher on the region at Sciences Po university in Paris, said diamond trafficking was not the sole motivation for Seleka's creation. It was formed to combat discrimination against Muslims, who were routinely extorted by security forces and denied access to schools and hospitals by a Christian-dominated civil service.
"This conflict is not just about resources," said Marchal. "If it is then why would we see this debate on nationality and whether Central Africans can be Muslims?"
FRANCE SEEKS AN EXIT
France, with its military already stretched fighting against al Qaeda allies in the Sahel, is pushing hard for a peace deal in Central African Republic so it can cut back its mission.
Yet the Brazzaville talks failed in their objective of addressing the key questions of disarmament and a roadmap for a lasting peace, including a power sharing deal.
Prospects for peace have been complicated by the return as Seleka's leader of hardline former President Michel Djotodia, whose supporters favour officially dividing the country in two.
His deputy Nourredine Adam, who has returned from Sudan with hundreds of fighters, was hit with U.N. sanctions this year over allegations of rights abuses and diamond smuggling.
Many fear the ceasefire is unlikely to hold. With anti-balaka attacking close to Bambari in recent days, Seleka's senior military commander General Joseph Zoundeyko has said he is ignoring the deal: "We did not want partition but it happened: the Christians drove us out of the south."
In a recent report, think-tank International Crisis Group called for mines to be occupied by international peacekeepers.
Yet diplomats and Seleka insiders say Djotodia and Adam will not hand over control: "Bambari and Bria are the financing of Seleka. They will never let them go," said one senior diplomat.
At the Ndassima mine, bare-chested labourers bristle at the thought of foreign interference in their business.
"We don't want international forces here. They'll take the mine from us," said one youth covered in glittering yellow mud on the lip of mine. "Now, Christians and Muslims live here in peace. If the French come, there will be violence." (Reporting by Daniel Flynn; Editing by Peter Graff)