* Islamist rebels holding eight French nationals, others
* Witnesses, town official say hostages there until late Jan.
* Al Qaeda has earned a fortune in ransom payments
By David Lewis
TIMBUKTU, Feb 8 (Reuters) - A feared commander of al Qaeda's North African wing kept several foreign hostages locked in a house in Timbuktu until just before French and Malian troops captured the ancient desert trading town last month, residents said.
Islamist rebels in northern Mali, including Al Qaeda in the Islamic Maghreb (AQIM), are holding at least seven French citizens, a Swede, a Dutchman, and a South African kidnapped in recent years in parts of the Sahara desert.
Residents in Timbuktu said some of the hostages were held in the house of Abou Zeid, the most feared commander of AQIM, al Qaeda's north African franchise, and the man responsible for imposing extreme sharia law in Timbuktu.
"In the last few days, the hostages were in that house with Abou Zeid," said Diadie Hamadoun Maiga, deputy head of Timbuktu's crisis committee, a body set up to liaise between the population and their Islamist rulers during the months-long rebel occupation.
Two witnesses confirmed that several Western-looking hostages were kept in the house, a beige flat-roofed building surrounded by a spacious, walled compound in the Abaradjou neighbourhood.
Their testimonies contrast with widely-held views among Mali-watchers that the hostages were being kept in Mali's remote northern mountains, near Algeria's border, where French and Chadian troops are now pursuing rebels.
The French foreign ministry declined to comment, but a French officer in Mali said he had heard similar reports of several hostages having been in Timbuktu.
Colonel Keba Sangare, the head of the Malian forces now in Timbuktu, confirmed that French and Malian security services had searched the house but he gave no further details.
AQIM has earned tens of millions of dollars in ransom payments for Westerners seized in the region and taken to its strongholds in northern Mali.
Abou Zeid, the emir of AQIM's southern territories, is regarded as one of its most ruthless operators. He is believed to have executed British national Edwin Dyer in 2009 and a 78-year-old Frenchman Michel Germaneau in 2010.
Canadian diplomat Robert Fowler, in an account of his kidnapping by another Islamist cell in the Sahara, recounted how Abou Zeid refused to give medication to two hostages suffering from dysentery, one of whom had been stung by a scorpion.
France launched a whirlwind assault to retake the vast desert region from AQIM and other Islamist rebels on Jan. 11 after a plea from Mali's caretaker government, causing the insurgents to retreat into the desert wilderness.
FRANCE DOING EVERYTHING TO FREE HOSTAGES
French President Francois Hollande said last week during a trip to Mali that Paris is doing everything in its power to free its citizens and that there is "still time" for their kidnappers to set them free.
Hollande last weekend during a trip to Mali he believed the hostages were now being held in the Adrar des Ifoghas mountains.
French and Malian troops reclaimed Timbuktu on Jan. 28 following days of heavy air strikes on rebel targets.
"On the second day of the French bombing, (the rebels) took seven blindfolded white people out of the house," said one resident, asking not to be identified.
Another inhabitant of the fabled desert town said he was about 30 metres (yards) away with some friends when the hostages were placed in a sand-coloured Toyota troop carrier and driven away, alongside a second four-by-four.
Hamadoun Maiga, citing his own network of sources, said the hostages were frequently moved from one location to another before the Islamists fled with them.
The likelihood the hostages could now be in the Adrar des Ifoghas is complicating operations by French, Nigerien and Chadian forces to hunt down Islamists in the remote northern mountain range. (Editing by Richard Valdmanis and Jon Hemming)