ASMARA, Sept 8 (Reuters) - Eritrea accused Ethiopia of scuppering demarcation talks on their disputed frontier on Saturday, further dimming prospects of resolving a five-year impasse.

Relations between the two Horn of Africa countries have deteriorated since their 1998-2000 border war ended, and diplomats say resentment on both sides over the border is helping to fuel a proxy war in Somalia.

Eritrea said no progress was made at talks this week with Ethiopia and a Hague-based boundary commission, which has set a November deadline for both parties to mark the border.

A source at the meeting said Eritrea had accepted four conditions set out by the independent commission, including lifting restrictions on a U.N. peacekeeping mission and withdrawing from a buffer zone.

But Ethiopia offered no proposals to the commission regarding demarcation, Eritrea's legal adviser said in a statement on the Information Ministry Website, www.shabait.com.

"Ethiopia stated that, even if Eritrea did everything that the Commission specified, it was not prepared to move forward," the statement said.

The source at the meeting said Ethiopia accused Eritrea of involvement in Somalia and Ethiopia's troubled Ogaden region, violating the Algiers accord ending their two-year border war.

Ethiopia and its closest ally the United States have repeatedly accused Eritrea of funnelling arms to what they say are al Qaeda-linked "terrorists".

They say Eritrea is supporting insurgents fighting Somalia's Ethiopian-backed government and separatist rebels in Ogaden.

Asmara has denied the charges. It says Washington, which is considering adding Eritrea to its list of state sponsors of terrorism, is fuelling conflicts in the Horn.

The source at the meeting said the boundary commission asked Ethiopia to indicate "unqualified acceptance" of its ruling on the 1,000 km (620 mile) border and abandon a longstanding demand for more dialogue over the issue.

The source expected the boundary commission to make one last attempt at mediation in November before disbanding itself.

As part of their 2000 peace deal, both Ethiopia and Eritrea agreed to accept as final and binding the boundary commission's ruling on their border.

But the process ground to a halt after Addis Ababa rejected the decision which awarded the flashpoint town of Badme to Eritrea. Asmara has refused to consider any changes.

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