* UN council resolution passed with support of China, Russia
* China says cautious about use and threat of sanctions
* Sudan, South Sudan blame each other for conflict (Adds details throughout)
By Michelle Nichols
UNITED NATIONS, May 2 (Reuters) - The U.N. Security Council threatened Sudan and South Sudan with sanctions on Wednesday if the former civil war foes fail to halt an escalating conflict and resume talks within two weeks on a string of disputes over oil revenues and border demarcation.
The 15-member panel unanimously approved a resolution after weeks of border fighting between the African neighbors that have raised fears Khartoum and Juba, which split when the south seceded last year, could launch an all-out war.
"The fighting must stop, and stop now," U.S. Ambassador to the United Nations Susan Rice told the council.
China, which has close trade relations with both countries, and Russia were reluctant to support the threat of sanctions against Sudan and South Sudan, but did so because the African Union had requested a legally binding resolution.
The AU asked for backing from the U.N. Security Council for demands made by its Peace and Security Council last week for Sudan and South Sudan to cease hostilities, withdraw troops from disputed areas and resume talks within two weeks with the aim of resolving all outstanding disputes.
"We are always very cautious about the use and threat of sanctions," China's U.N. Ambassador Li Baodong told the council. "China has all along maintained that African issues should be settled by the Africans in African ways."
Beijing has traditionally acted as Sudan's protector on the council and for years has shielded it from U.S. and European calls for sanctions due to its handling of conflicts in its western Darfur region and elsewhere in the country.
The resolution passed on Wednesday threatens both Sudan and South Sudan with "additional measures" under Article 41 of the U.N. charter, which allows the council to impose economic and diplomatic sanctions on countries that ignore its decisions.
"The arsenal of political and diplomatic instruments for normalizing the situation has nowhere been exhausted," Russia's U.N. Ambassador Vitaly Churkin told the council. "We consider sanctions as an extreme measure."
He added that sanctions should not be used in relation to conflicts in the Sudanese states of South Kordofan and Blue Nile, where fighting has been raging for months between Sudan's army and rebels who want to topple to Khartoum government.
Distrust runs deep between Sudan and South Sudan, who are at loggerheads over the position of their border, how much the landlocked south should pay to transport its oil through Sudan, and the division of national debt, among other issues.
Sudan's U.N. Ambassador Daffa-Alla Elhag Ali Osman made clear to the council that Khartoum was disappointed with the approved resolution.
"It is notable that the resolution has disregarded the continuous aggression by South Sudan against Sudan," Osman told the council.
"Peace ... will only be achieved through halting all forms of support and sheltering of proxy rebel and armed groups espoused by the South Sudan," he said.
South Sudan's Minister of Cabinet Affairs Deng Alor Kuol told the council that Juba would comply with the resolution.
"We appeal to the United Nations and its member states to urgently mobilize humanitarian assistance for the population affected by Sudan's continuous aerial bombardment and ground incursions in northern states of South Sudan," he said.
Sudan denied launching air strikes but said its ground forces had attacked southern artillery positions that had fired on the north. Clashes along the ill-defined border led to a standoff over the Heglig oil field after it was seized last month by troops from South Sudan.
Sudan said earlier on Wednesday the Heglig oilfield had been repaired and had started pumping oil again. (Editing by Mohammad Zargham)