* Rwanda defense minister accused of commanding Congo rebels
* Uganda, Rwanda deny accusations of involvement
* Nearly half a million people displaced due to fighting
* U.N. says rebellion also being funded by traders in Rwanda
By Michelle Nichols and Louis Charbonneau
UNITED NATIONS, Oct 19 (Reuters) - The U.N. Security Council intends to impose sanctions on the leaders of the Democratic Republic of Congo's M23 rebels and others violating an arms embargo on the country, according to a statement the council unanimously adopted on Friday.
Rwandan Defense Minister James Kabarebe is commanding the insurgency in eastern Congo that is being armed by Rwanda and Uganda, both of which also sent troops to aid deadly attacks, according to a U.N. experts' confidential report seen by Reuters on Tuesday.
"The Security Council expresses its intention to apply targeted sanctions against the leadership of the M23 and those acting in violation of the sanctions regime and the arms embargo," the 15-member council said in the statement obtained by Reuters.
The council strongly condemned any external support to the M23 rebels, expressed "deep concern at reports indicating that such support continues to be provided to the M23 by neighboring countries" and demanded that it stop immediately.
The Security Council's Group of Experts said in its report that Rwanda and Uganda - despite their strong denials - continued to support M23 rebels in their six-month fight against Congolese government troops.
The Security Council statement on Friday stressed "the urgency of constructive engagement and dialogue between the DRC and its neighbors, especially Rwanda, and the need to address the underlying causes of the conflict in eastern DRC."
The Congolese government on Wednesday demanded targeted sanctions against Rwandan and Ugandan officials named in the U.N. experts' report.
Rwandan Foreign Minister Louise Mushikiwabo on Thursday dismissed the idea that action should be taken on the basis of a report that she called flawed and untrue. She said the priority was to work out how to pacify the region.
"It's wrong. This report is very problematic so anybody who would want to take action based on that report would be really unfortunate," Mushikiwabo told Reuters in an interview.
Bosco Ntaganda, a former Congolese general wanted by the International Criminal Court for alleged war crimes, controls the rebellion on the ground, and M23 leader Sultani Makenga is in charge of operations and coordination with allied armed groups, the U.N. report said.
Ntaganda and Makenga "receive direct military orders from RDF (Rwandan army) Chief of Defense staff General Charles Kayonga, who in turn acts on instructions from Minister of Defense General James Kabarebe," it said.
Uganda and Rwanda have denied the accusations of involvement by the U.N. experts, who monitor compliance with sanctions and an arms embargo on the Congo.
They delivered their report to the Security Council's Congo sanctions committee earlier this month.
Nearly half a million people have been displaced due to the fighting. M23 has proven so resilient that one senior U.N. diplomatic source told Reuters that Rwanda has effectively "annexed" mineral-rich eastern Congo thanks to the rebel force.
"The Security Council also condemns the attempts by the M23 to establish a parallel administration and to undermine State authority," it said in Friday's statement.
Rwanda has backed armed movements in the Congo during the past two decades, citing a need to tackle Rwandan rebels operating out of Congo's eastern hills.
The latest rebellion also is being funded by traders in Rwanda who are profiting from tin, tungsten and tantalum smuggled across the border from mines in the eastern DRC, according to the U.N. experts' report.
The accusations have prompted the United States, Sweden and the Netherlands to suspend some aid to Rwanda, which relies on donors for about 40 percent of its budget. Last month the European Union froze further budgetary support to Rwanda.
Mushikiwabo said it was "the biggest mistake" for any countries to withdraw aid over the U.N. report.