The violence, and a denial by opposition leader Raila Odinga that he would agree to serve as prime minister under President Mwai Kibaki, followed the first meeting between the two rivals since a disputed December 27 election triggered a political crisis.

"Nakuru town has been shut down ... My staff have carried three dead bodies and hundreds are injured in hospital," Kenya Red Cross head Abbas Gullet said.

Paramilitary police were deployed on the outskirts of Nakuru, in Kenya's fertile Rift Valley, where houses burned and the sound of gunshots filled the air. Aerial pictures of surrounding villages showed smoke rising from a number of torched homesteads.

About 700 people have died in violence since Kibaki was re-elected after polls observers said were flawed and Odinga and his Orange Democratic Movement (ODM) say were rigged.

The turmoil has also made 250,000 people homeless and damaged one of Africa's most promising economies.

Hopes for a solution had grown on Thursday after former U.N. boss Kofi Annan brought Odinga and Kibaki together for their first discussions on how to end the standoff.

But their smiles and handshake were quickly followed by new accusations, with the opposition angered by Kibaki's reference to himself as the country's "duly-elected" leader.

On Friday, Odinga urged the African Union to avoid endorsing Kibaki's re-election at a planned summit in Ethiopia.

In an interview with Reuters, he ruled out taking a new post of prime minister in Kibaki's government -- a solution some media and diplomats have touted. He said the only three acceptable options would be Kibaki's resignation, a vote re-run, or power-sharing followed by a new election.

He said he was willing to meet Kibaki again. "I would ask him to desist from making those kind of embarrassing remarks which will definitely undermine the process of mediation."

"PLANNED ATTACKS"

Kibaki's Party of National Unity accuses the opposition of pre-planning violence against Kibaki's Kikuyu ethnic group and says it should respect the election board's verdict he won.

"We should focus on the bigger picture -- how we resolve the conflicts we are having in the country, not the semantics and phrases in speeches," Foreign Minister Moses Wetangula said.

"We are moving on."

Around Nakuru, Kikuyus were fighting with Luos and Kalenjins seen as supporters of Odinga, residents said.

"We can no longer stand back and watch as our brothers are killed in Eldoret," said bus conductor Dennis Kariuki, referring to past killings of Kikuyus in Eldoret, also in the Rift Valley.

"We have vowed that for every Kikuyu killed in Eldoret, we shall kill two Kalenjins who are living in Nakuru town."

Another witness, Joel Okumu, said his house was targeted in the town on Thursday night.

"The attack was sudden and well planned as they knew which house to burn despite the darkness," he said.

"As I was escaping, I saw two bodies with deep cuts by the roadside and I am sure there are many more as the violence went on for the better part of the night."

The Kibaki-Raila meeting was applauded around the world, including in statements from the European Union and U.S. presidential candidate Barack Obama. But diplomats expressed concern for the future of the mediation process.

Western powers have criticised the presidential vote as deeply flawed, particularly in the tallying process, and are pushing for some sort of power-sharing arrangement.