Sudanese armed forces seized the rebel stronghold of Kurmuk in Blue Nile state, both sides said on Thursday, after two months of heavy fighting in the state on the border with newly independent South Sudan.

'Our troops entered the town of Kurmuk, expelled the insurgents and killed and wounded many (of them) and they are now cleansing the town,' Sudan's defence ministry website said.

Violence in Sudanese border states has soured talks between Khartoum and former civil war foe South Sudan who have yet to resolve issues such as how to share oil revenues or other assets after South Sudan seceded as part of a 2005 peace deal.

A spokesman for SPLM-North in Blue Nile said rebels had withdrawn from Kurmuk, where its leader Malik Agar was believed to be hiding, but that the rebels would fight on.

'The SPLM troops have withdrawn from Kurmuk for strategic reasons. The Sudanese army controls Kurmuk but this is not the end of the war in Blue Nile,' said spokesman Sulaiman Othman.

Blue Nile and South Kordofan are north of the new border and remain part of Sudan, but are home to many who sided with the south during one of Africa's longest and deadliest civil wars.

Both sides have also failed to find a solution for the disputed border region of Abyei which Khartoum seized in May.

Rebels in border states say they have been politically and economically marginalised by Sudan's government. Khartoum accuses the insurgents of trying to spread chaos and says it will not tolerate armed militias on its side of the border.

Fighting between the Sudanese army and SPLM-North rebels erupted in Blue Nile in September, spreading from neighbouring northern state South Kordofan where violence began in June.

Khartoum accuses South Sudan of backing the rebels in both states. Juba has denied the charges.

Border violence has also badly affected ties between Sudan and Western powers. Obama extended trade sanctions this week that have been in place since 1997.-Reuters