* Difficulties also identified - French envoy

* Turkey wants Armenian concessions before opening border

* Azeri leader warned of force ahead of meeting (Adds quotes, background)

By Anna Holzer

MUNICH, Germany, Nov 22 (Reuters) - Mediators reported important progress at talks on Sunday between Azerbaijan and Armenia on the Nagorno-Karabakh conflict, but said difficulties were also identified as the Azeri leader threatened renewed war.

Tensions over the breakaway mountain region are rising, with oil-producing Azerbaijan angry at a deal between ally Turkey and Armenia to open their border, 16 years after Ankara closed it in solidarity with Azerbaijan during the Nagorno-Karabakh war.

Turkey says it will only go through with the deal if Armenia makes concessions on Nagorno-Karabakh, where ethnic Armenians backed by Christian Armenia broke away from Muslim Azerbaijan as the Soviet Union headed towards its 1991 collapse.

The rebel territory lies at the heart of the South Caucasus, a strategic crossroads and key transit region for oil and gas, where Russia and the West are vying for influence.

Mediators from the Organisation for Security and Cooperation in Europe gave few details after four hours of talks between Azeri President Ilham Aliyev and his Armenian counterpart Serzh Sarksyan, but reported progress as well as difficulties.

Both presidents left the meeting at the French General Consul's residence in Munich without talking to reporters. It was their sixth meeting this year.

"Some important progress has been reached," French mediator Bernard Fassier told reporters. "At the same time we have identified some difficulties."

Fassier said he and his co-mediators from the United States and Russia would start preparing the next meeting, without specifying when it might take place. "We hope for additional progress in the following weeks and beginning of next year."

"MILITARY MEANS"

Aliyev, whose country is being courted by Europe to supply gas for the planned Nabucco pipeline, had raised the stakes before the talks, warning that the meeting would be "decisive" and that his army was ready to take back the region by force.

"Azerbaijan is spending billions on buying new weapons, hardware, strengthening its position on the line of contact," Aliyev said in comments broadcast on Saturday. "We have the full right to liberate our land by military means."

Fassier, in response, said: "Our governments are of the opinion that war is not an option."

Analysts say Aliyev's warning reflects Azeri anger over the deal between Turkey and Armenia, which is aimed at burying a century of hostility stemming from the mass killing of Armenians by Ottoman Turks.

The deal carries huge significance for Turkey's diplomatic clout in the strategic Caucasus region, for its bid to join the European Union, and for landlocked Armenia's struggling economy.

Azerbaijan fears it will lose leverage over Armenia. Stung by the backlash and facing tough talks over Azeri gas supplies, Ankara says it wants progress on Nagorno-Karabakh before it ratifies the Armenia deal. Armenia rejects the link.

Some 30,000 people died and more than one million were made homeless before a ceasefire was declared in Nagorno-Karabakh in 1993. The territory wants recognition as an independent state, but without a full peace deal sporadic exchanges of fire continue to threaten fresh conflict.

The principles of a deal would see Nagorno-Karabakh give back most of seven surrounding Azeri districts captured during the war, in exchange for greater international legitimacy before a popular vote in the future to decide its final status. (Writing by Matt Robinson; editing by Elizabeth Fullerton) ((matt.robinson@thomsonreuters.com; +995 32 999 370))

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