(Adds civilian killed by stray bullet, background)

By Yara Bayoumy

BEIRUT, July 18 (Reuters) - The Islamist militant group battling Lebanese troops at a Palestinian refugee camp said on Wednesday it was willing to resume talks to end the fighting, a move that came after it lost ground in a two-month-old battle.

Lebanese troops have entered the battered Nahr al-Bared camp in northern Lebanon and seized further territory, cornering the al Qaeda-inspired militants and pressuring them to surrender.

Fatah al-Islam's spokesman, Abu Salim Taha, who had not been heard from in more than a month, told Al Jazeera television by telephone that "right now, perhaps there is no objection for negotiations and political solutions to return to reality".

"The ball is in the court of the other side, the court of those behind the army," said Taha, who Palestinian sources said last month had been wounded in battles.

The call is unlikely to be taken seriously by the Lebanese army which is said to be days away from crushing the militants in a battle that has so far killed 231 people in the worst internal violence since the 1975-1990 civil war.

"We don't want anything but for them to surrender. All of this is a media propaganda because the noose is tightening around them," a military source said.

At least 109 troops, 81 militants and 41 civilians have been killed in the camp and other areas in fighting that erupted on May 20.

Several mediation efforts, mostly by Palestinian faction representatives and Palestinian religious scholars, have failed to end the crisis. Taha said most of the civilians fled Nahr al-Bared except some who remained to fight alongside them.

"The army ... gave the Fatah al-Islam elements numerous chances to surrender without any bloodshed," said army commander General Michel Suleiman in a statement.

"But these criminals continued their futile stubbornness ... which did not leave the army command with any option except to take the decision to end this abnormal phenomenon by force."

BOOBYTRAPPED BUILDINGS

Lebanese security forces have rarely entered Palestinian refugee camps since a 1969 Arab agreement banned them from doing so. The deal was annulled by the Lebanese parliament in the mid-1980s but the accord effectively stayed in place.

Meanwhile, security sources said two Lebanese soldiers died overnight in a booby-trapped building at the camp while another soldier's body was pulled from under rubble on Wednesday. They said the soldier, a member of a commando unit, died last week.

Witnesses said clashes erupted along the camp's main road. The army used artillery and tank shells, while the militants responded with automatic weapons and fired more than a dozen Katyusha rockets that landed nearby but caused no casualties.

A Lebanese civilian was also killed by a stray bullet a few kilometres from the camp, they said.

Fatah al-Islam is made up of a few hundred mainly Arab fighters who admire al Qaeda but do not claim any organisational links.

The violence has further undermined stability in Lebanon, where a paralysing 8-month-old political crisis has been compounded by bombings in and around Beirut, the assassination of an anti-Syrian legislator and a fatal attack on U.N. peacekeepers. (Additional reporting by Laila Bassam in Beirut, Nazih Siddiq in Nahr al-Bared and Firouz Sedarat in Dubai)

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