* Sources in northern Mali say Abou Zeid dead
* France cautious, says no official confirmation
* Algerians conduct DNA tests on members of family- media (Adds French officials, military operation near Gao, Ban)
By Cheick Diouara
GAO, Mali, March 1 (Reuters) - One of al Qaeda's most feared commanders in Africa has been killed by French air strikes in north Mali, sources close to Islamist militants and tribal elders said on Friday, but France said it could not confirm this.
The local sources said Abdelhamid Abou Zeid, blamed for kidnapping at least 20 Western hostages in the Sahara desert in recent years, was among 40 militants killed four days ago in the foothills of the Adrar des Ifoghas mountains.
About 1,200 French troops and 800 Chadian soldiers are hunting down pockets of al Qaeda-linked insurgents in the border region with Algeria after a seven-week French-led ground-and-air operation broke Islamist domination of northern Mali.
Algeria's Ennahar television, which is well connected with Algerian security services, reported Abou Zeid's death on Thursday but French, Malian and Chadian officials did not confirm it.
An Algerian former smuggler turned jihadi, Abou Zeid is regarded as one of the most ruthless operators in al Qaeda in the Islamic Maghreb (AQIM). He is believed to have executed British hostage Edwin Dyer in 2009 and 78-year-old Frenchman Michel Germaneau in 2010.
A trusted lieutenant of AQIM's leader Abdelmalek Droukdel, Abou Zeid imposed a violent form of sharia law, including amputations and the destruction of ancient Sufi shrines, while Islamists controlled Mali's ancient desert town of Timbuktu, in acts reminiscent of the Taliban in Afghanistan.
"The death of Abou Zeid has been confirmed by several of his supporters who have come back from the mountains," said Ibrahim Oumar Toure, a mechanic in the northern Malian town of Kidal who worked with Islamist rebels and remains in contact with them.
A community leader in Kidal, who declined to be identified, said Abou Zeid was dead. Members of the MNLA Tuareg rebel group, based in Kidal, said Islamist prisoners seized during the fighting had also said the militant leader had been killed.
However, French government spokeswoman Najat Vallaud-Belkacem said she could neither confirm nor deny the report, and French officials urged caution. An official MNLA spokesman said the group had no evidence proving he was dead.
French radio RFI and Algerian daily El Khabar reported that DNA tests were being conducted on members of Abou Zeid's family to confirm whether a body recovered by French troops after fighting in Adrar des Ifoghas was indeed the Islamist leader.
The death of Abou Zeid, who has earnt AQIM tens of millions of dollars with a spate of kidnappings of Westerners in the Sahara over the last five years, would be a significant but far from fatal blow to the group.
Mokhtar Belmokhtar, the one-eyed mastermind of a mass hostage-taking at the In Amenas gas plant in Algeria last month, and Tuareg Islamist leader Iyad ag Ghali, who was this week placed on the U.S. global terrorist list, both remain at large.
In a speech on Friday, French President Francois Hollande said the operation in Mali was in its final stage and he was not obliged to confirm Abou Zeid's death.
"Terrorist groups have taken refuge and are hiding in an especially difficult zone," he said. "Information is out there. I don't have to confirm it because we must reach the end of the operation."
A U.S. official and Western diplomat, however, said the reports appeared to be credible.
According to local sources in Kidal, MNLA Tuareg rebels, who are working with French forces, had located Abou Zeid's fighters and handed over the coordinates for French jets to strike.
"They were hidden in mountain caves and were building bombs for suicide attacks when they were killed," Toure said.
Abou Zeid's death will be of particular interest to the French government as he is believed to be holding at least four French citizens kidnapped from Niger in 2010.
After its success in dislodging al Qaeda fighters from northern Mali's towns, France and its African allies have faced a mounting wave of suicide bombings and guerrilla-style raids by Islamists in northern Malian towns.
Malian troops late on Thursday entered Kadji, a village just outside northern Mali's largest town Gao, and arrested 16 people suspected of links to Islamist gunmen who raided the centre of town last month.
United Nations Secretary-General Ban Ki-moon said in Geneva on Friday that a U.N. peacekeeping force to replace French troops in Mali should be discussed as soon as possible. (Reporting By Elizabeth Pineau in Paris, Lamine Chikhi in Algiers and John Irish and David Lewis in Dakar; Writing by John Irish and Daniel Flynn; Editing by Alistair Lyon)