* Hostages said to be bound, under tight guard
* Militants warn against attempts to free hostages
* Algerian government rules out negotiating
By Lamine Chikhi and Bate Felix
ALGIERS/BAMAKO, Jan 17 (Reuters) - Islamist fighters have opened an international front in Mali's civil war by taking dozens of Western hostages at a gas plant in the Algerian desert just as French troops launched an offensive against rebels in neighbouring Mali.
Nearly 24 hours after gunmen stormed the natural gas pumping site and workers' housing before dawn on Wednesday, little was certain beyond a claim by a group calling itself the "Battalion of Blood" that it was holding 41 foreign nationals, including Americans, Japanese and Europeans, at Tigantourine, deep in the Sahara.
Algerian media said a Briton and an Algerian were killed in the assault. Another local report said a Frenchman had died.
One thing is clear: as a headline-grabbing counterpunch to this week's French buildup in Mali, it presents French President Francois Hollande with a daunting dilemma and spreads fallout from Mali's war against loosely allied bands of al Qaeda-inspired rebels far beyond Africa, challenging Washington and Europe.
A French businessman with employees at the site said the foreigners were bound and under tight guard, while local staff, numbering 150 or more, was held apart and had more freedom.
Led by an Algerian veteran of guerrilla wars in Afghanistan, the group demanded France halt its week-old intervention in Mali, an operation endorsed by Western and African allies who fear that al Qaeda, flush with men and arms from the defeated forces of Libya's Muammar Gaddafi, is building a haven in the desert.
Hollande, who won wide praise for ordering air strikes and sending troops to the former French colony, said little in response. In office for only eight months, he has warned of a long, hard struggle in Mali and now faces a risk of attacks on more French and other Western targets in Africa and beyond.
The Algerian government ruled out negotiating and the United States and other Western governments condemned what they called a terrorist attack on a facility, now shut down, that produces 10 percent of Algeria's gas, much of which is pumped to Europe.
The militants, communicating through established contacts with media in neighbouring Mauritania, said they had dozens of men at the base, near the town of In Amenas close to the Libyan border, and that they were armed with mortars and anti-aircraft missiles.
They said they had repelled a raid by Algerian forces after dark on Wednesday. There was no government comment on that. Algerian officials said earlier about 20 gunmen were involved.
LIVES AT RISK
The militants issued no explicit threat but made clear the hostages' lives were at risk: "We hold the Algerian government and the French government and the countries of the hostages fully responsible if our demands are not met and it is up to them to stop the brutal aggression against our people in Mali," read one statement carried by Mauritanian media.
The group also said its fighters had rigged explosives around the site and any attempt to free the hostages would lead to a "tragic end." The large numbers of gunmen and hostages involved pose serious problems for any rescue operation.
Smaller hostage-taking incidents have been common in the Sahara and financial gain plays a part in the actions of groups whose members mingle extremist religious aims with traditional smuggling and other pursuits in the lawless, borderless region.
Algerian Interior Minister Daho Ould Kablia said the raid was led by Mokhtar Belmokhtar, who fought Soviet forces in Afghanistan in the 1980s and recently set up his own group in the Sahara after falling out with other local al Qaeda leaders.
A holy warrior-cum-smuggler dubbed "The Uncatchable" by French intelligence and "Mister Marlboro" by some locals for his illicit cigarette-running business, Belmokhtar's links to those who seized towns across northern Mali last year are unclear.
French media said the militants were also demanding that Algeria, whose government fought a bloody war against Islamists in the 1990s, release dozens of prisoners from its jails.
The militants said seven Americans were among the 41 foreign hostages - a figure U.S. officials said they could not confirm.
Norwegian energy company Statoil, which operates the gas field in a joint venture with Britain's BP and the Algerian state company Sonatrach, said nine of its Norwegian employees and three of its Algerian staff were being held.
Also reported kidnapped, according to various sources, were five Japanese working for the engineering firm JGC Corp, a French national, an Austrian, an Irishman and a number of Britons.
U.S. Defense Secretary Leon Panetta said, "I want to assure the American people that the United States will take all necessary and proper steps that are required to deal with this situation."
He said he lacked firm information on whether there were links to the situation in Mali. Analysts pointed to shifting alliances and rivalries among Islamists in the region to suggest the hostage-takers may have a range of motives.
In their own statements, they condemned Algeria's secularist government for "betraying" its predecessors in the bloody anti-colonial war against French rule half a century ago by letting French warplanes fly over its territory to Mali. They also accused Algeria of shutting its border to Malian refugees.
Panetta said Washington was still studying legal and other issues before providing more help to France in the war in Mali.
Hollande has called for international support against rebels who France says pose a threat to Africa and the West, and admits it faces a long struggle against well-equipped fighters who seized Timbuktu and other oasis towns in northern Mali and have imposed Islamic law, including public amputations and beheading.
Islamists have warned Hollande that he has "opened the gates of hell" for all French citizens.
Some of those held at the facility, about 1,300 km (800 miles) inland, had sporadic contact with the outside world.
The head of a French catering company said he had information from a manager who supervises some 150 Algerian employees at the site. Regis Arnoux of CIS Catering told BFM television the local staff was being prevented from leaving but was otherwise free to move around inside and keep on working.
"The Westerners are kept in a separate wing of the base," Arnoux said. "They are tied up and are being filmed. Electricity is cut off, and mobile phones have no charge.
"Direct action seems very difficult. ... Algerian officials have told the French authorities as well as BP that they have the situation under control and do not need their assistance."
French army chief Edouard Guillaud said ground forces were stepping up their operation to engage directly "within hours" the alliance of Islamist fighters, grouping al Qaeda's North African wing AQIM and Mali's home-grown Ansar Dine and MUJWA.
West African military chiefs said the French would soon be supported by about 2,000 troops from Nigeria, Chad, Niger and other states - part of a U.N.-mandated deployment that had been expected to start in September before Hollande intervened.
Chad's foreign minister, Moussa Faki Mahamat, told Radio France International his country alone would send 2,000 troops, suggesting plans for the regional force were already growing.
In Mali, residents said a column of some 30 French Sagaie armoured vehicles had set off toward rebel positions from the town of Niono, 300 km (190 miles) from the capital, Bamako.
A Malian military source said French special forces units were taking part in the operation. Guillaud said France's strikes, involving Rafale and Mirage jet fighters, were being hampered because militants were sheltering among civilians.
Many inhabitants of northern Mali have welcomed the French attacks, although some also fear being caught in the cross-fire.
Hollande said on Tuesday that French forces would remain in Mali until stability returned to the West African nation.
The conflict, in a landlocked state of 15 million twice the size of France, has displaced an estimated 30,000 people and raised concerns across mostly Muslim West Africa of a radicalisation of Islam in the region.
But many who have lived for many months under harsh and violent Islamist rule said they welcomed the French.
"There is a great hope," one man said from Timbuktu, where he said Islamist fighters were trying to blend into civilian neighbourhoods. "We hope that the city will be freed soon."