(Adds more rockets fired, soldiers wounded, paragraphs 2,3)

By Nazih Siddiq

NAHR AL-BARED, Lebanon, July 13 (Reuters) - Islamist militants fired Katyusha rockets at Lebanese villages on Friday, escalating their 8-week-old battle with the army at a Palestinian refugee camp in northern Lebanon.

Security sources said al Qaeda-inspired Fatah al-Islam fighters fired about 18 of the 107 mm rockets which landed several miles away from the Nahr al-Bared camp, wounding two civilians and causing material damage.

They said three Lebanese soldiers died in fresh battles at the camp on Friday. Another soldier wounded in ferocious fighting on Thursday died of his wounds, bringing the military's death toll in the past two days to 10 with 35 soldiers wounded.

Fighting between the army and Islamist militants has killed at least 218 people since May 20, making it the country's worst internal violence since the 1975-1990 civil war.

The military, concerned about being sucked into a war of attrition, has stepped up pressure on the coastal camp to force the militants to surrender.

But the well-trained and well-armed militants, some of whom have fought in Iraq or trained to go to fight there, have so far rejected all calls to surrender.

Witnesses said the army was bombarding the battered camp with artillery and tanks. Militants were responding with sniper and rocket fire. Black and grey smoke billowed from the camp's battered buildings, most of which have been reduced to rubble.

A military source said two rockets fired by Fatah al-Islam late on Thursday had killed one civilian.

"Army forces gained control lately of a number of buildings and fortifications the terrorists of Fatah al-Islam used to attack the army and carry out sniper attacks on its positions," an army statement said.

It added that engineering units were clearing the seized buildings from mines and booby traps.

Thursday's fighting was the most ferocious since the Lebanese defence minister declared on June 21 that all major combat operations had ceased at Nahr al-Bared.

At least 97 soldiers, 76 militants and 45 civilians have been killed in fighting with Islamist militants in the camp and other areas since May 20.

A 1969 Arab agreement banned Lebanese security forces from entering Palestinian camps. The agreement was annulled by the Lebanese parliament in the mid-1980s but the accord effectively stayed in place.

The violence has further undermined stability in Lebanon, where a paralysing 8-month political crisis has been compounded by bombings in and around Beirut. The country has yet to recover from last year's war between Israel and Hezbollah guerrillas.

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