(Names victim, adds details)

By Faris Ali

PESHAWAR, Pakistan, Nov 12 (Reuters) - Gunmen killed a U.S. aid official on Wednesday outside his home in Peshawar, police said, the Pakistani city that has borne the brunt of an Islamist insurgency spreading from tribal lands bordering Afghanistan.

Spiralling violence has raised fears of instability in nuclear-armed Pakistan, whose support is seen as vital to the defeat of al Qaeda globally and the Taliban in Afghanistan.

The U.S. aid official and his Pakistani driver were in a Peshawar neighbourhood favoured by diplomats and foreign aid workers close to the American Club. "As he was coming out of his home, the attackers opened fire on him and killed him along with his driver," said a senior police officer, who requested anonymity.

Peshawar is the last city on the road to the Khyber Pass, the main land route to Afghanistan, close to the rugged semi-autonomous tribal region where al Qaeda and Taliban insurgents have taken root.

The victim was Steve Vance, the head of U.S. government funded project to develop livelihoods in the tribal region, police officials, and a former colleague said.

He was living in Peshawar with his wife and five children, having arrived in the city early this year, according to the ex-colleague.

U.S. missile strikes in the tribal lands bordering Afghanistan have fuelled growing anti-American sentiment.

During the 1980s, Peshawar became a den of spies and jihadis when the United States and Saudi Arabia covertly funded a mujahideen guerrilla war to expel the Soviet army from Afghanistan.

In late August, three members of the U.S. consulate in Peshawar escaped unhurt after gunmen ambushed their vehicle.

The U.S. embassy in Islamabad confirmed that an American had been killed and that he was not a diplomat, but withheld his name.

"An American citizen and his Pakistani driver were killed in an attack in Peshawar," acting embassy spokesman Wesley Robertson said. "The attack is currently under investigation and we are coordinating with the local authorities." Pakistan is a non-family posting for U.S. diplomats.

SUICIDE CAR BOMB

Just hours after the shooting, a suicide car-bomber killed three Pakistani soldiers and wounded four in an attack on a military camp in the northwestern town of Shabqadar, 35 km (20 miles) north of Peshawar and close to the Mohmand tribal region.

On Tuesday evening, a suicide bomber killed three people outside a sports stadium in Peshawar.

Pakistani security forces have been battling Islamist guerrillas for months in the tribal region of Bajaur and the northwestern valley of Swat, where eight militants and a soldier were killed in fighting on Wednesday, a military official said.

There are expectations that Pakistan will launch an offensive soon in Mohmand, the tribal region between Bajaur and Peshawar.

Peshawar residents were frightened earlier this year when supposed Taliban fighters became bold enough to drive into the city in daylight to threaten video shop owners and barbers, targeted because of the Taliban's strict interpretation of Islam.

Security forces subsequently launched punitive operations in adjoining tribal areas targeting gangs said to have been using Islamist zeal as a cover for criminal activities.

Three Americans were among the 55 people killed in a truck bombing that destroyed the Marriott Hotel in Islamabad on Sept. 20. Diplomat David Foy was killed by a suicide car bomber in the southern city of Karachi in 2006. (Additional reporting by Alamgir Bitani and Zeeshan Haider; Writing by Simon Cameron-Moore; Editing by Valerie Lee)

AlertNet news is provided by