Somali rebel chief Aweys calls for truce in south

* Two rebel groups fought for Kismayu

* Clashes continue around southern port

* China forgives $120 million in loans

(Updates with China, paragraphs 13-15)

By Ibrahim Mohamed

MOGADISHU, Oct 6 (Reuters) - The leader of Somalia's Hizbul Islam rebels, Sheikh Hassan Dahir Aweys, called on rival al Shabaab insurgents on Tuesday to agree a ceasefire and end days of sporadic clashes around the southern port of Kismayu.

Fighters from al Shabaab, which Washington says is al Qaeda's proxy in the failed Horn of Africa state, drove Hizbul Islam gunmen out of Kismayu last week and the two groups have continued to battle each other in surrounding districts.

Aweys told reporters in the capital Mogadishu the fighting between the rebels was only helping their mutual foes -- Somalia's U.N.-backed government and African Union peacekeepers.

"I am telling al Shabaab to stop fighting us and accept a ceasefire," the elderly cleric told a news conference.

"I am asking them to stop the fighting, which is only useful to the enemy. It is immoral. Muslim blood is being shed."

Until last week's battle for Kismayu, the country's two main insurgent groups had controlled the strategic port and much of southern and central Somalia in an uneasy alliance.

Western donors have long hoped hardliners in al Shabaab could be isolated by a deal between more moderate Hizbul leaders and President Sheikh Sharif Ahmed's government.

Ahmed has had little luck luring Aweys to his side, but a worsening rift between the insurgents could give his fragile administration some much needed breathing space.



HIDEOUT FOR MILITANTS

Western security experts warn the country has become a safe haven for militants, including foreign jihadists, who are using it to plot attacks across the region and beyond.

Fighting in Somalia has killed nearly 19,000 civilians since the start of 2007 and driven 1.5 million from their homes.

Al Shabaab has blamed the fighting in Kismayu on a local Hizbul commander in the area, and on Tuesday Aweys appealed to the commander to stop the bloodshed.

"Sheikh Ahmed Madobe, who is leading the fighting, is one of our mujahideen of Hizbul Islam. I am calling for that fighting to stop," Aweys said. "I am asking our brothers (in al Shabaab) for talks. These clashes are spoiling our principles."

Separately on Tuesday, Somali and Chinese officials said China had told the Somali government that Beijing was forgiving repayment of a series of loans totalling nearly $120 million.

"We hope that other countries will now follow China and cancel our debts," Mohamed Osman, Somalia's consul in neighbouring Kenya, told Reuters after the signing ceremony at the Chinese Embassy in Nairobi.

"They did it because they recognised we were not in a position to reimburse them ... This deal is part of greater economic and technical cooperation. If we achieve stability, China will be a business partner that will play an important role helping to rebuild our country's shattered economy."