MOSCOW, March 27 (Reuters) - Special forces have killed three rebels in Russia's volatile southern region of Dagestan bordering Chechnya after a battle that raged for nearly a day, Russian media reported on Thursday.

The forces laid siege late on Wednesday to an apartment building in the town of Dagestanskiye Ogni in the Caspian Sea republic's southeast. Agency reports said intense shooting erupted after suspected rebels declined to surrender.

Vesti-24 television showed the special forces near the five-storey building and an armoured personnel carrier firing machine gun bursts into the window of one of the flats from close range. Smoke was billowing from the window.

"At the moment there is no shooting coming from the apartment, it has been suppressed by the fire of special forces," Interfax news agency quoted a source close to the operation as saying.

Dagestan and Ingushetia, part of the complex ethnic and cultural patchwork of the North Caucasus, have become more unstable than Chechnya where Moscow has fought two wars against pro-independence rebels since 1994.

Skirmishes with federal troops, mine explosions and kidnappings have become commonplace in impoverished Dagestan. The authorities blame the instability on Islamic rebels including those flushed out of Chechnya by pro-Moscow troops. (Reporting by Dmitry Solovyov; Editing by Robert Woodward)

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