By Jack Kimball

NDERI, Kenya, Jan 31 (Reuters) - Just 20 minutes outside Kenya's capital Nairobi, wafts of smoke cloak the valley from fires lit by a mob looking for revenge.

Part of a wire fence lies on the ground where residents say the mob tried to break into the compound.

When they could not get in, residents said members of the crowd started the bush fires.

"These people come for revenge because we are not from their community," Benjamin Ekwaro said outside Nderi town, nestled in Central Province, an area mainly inhabited by ethnic Kikuyu -- the tribe of President Mwai Kibaki.

"We suspect they're trying to surround us. We're in a state of panic," said another man who gave his name simply as Evans.

Automatic rifle fire echoed over the valley.

Protests over Kibaki's disputed re-election a month ago have deteriorated into cycles of killing between ethnic groups. Residents fear the clashes are moving from the Rift Valley, where more than 100 were killed last week, towards the capital.

Just outside Nderi, dozens of youths burned branches and piled rocks to try to block the main road from Nairobi to the Rift Valley towns of Nakuru and Naivasha, which have seen the worst of the violence in recent days.

Police moved up and down the road breaking the barricades and dispersing angry youths, occasionally firing into the air.

Some 850 have been killed in clashes in Kenya since the Dec. 27 polls. Most of the deaths came in attacks that first targeted Kibaki's Kikuyu tribe, whose members are now taking revenge on the Luos, Luhyas and Kalenjins seen as opposition supporters.

In Nderi, a group of around 100 Kikuyus gathered outside the Forestry Research Centre where more than 100 Luos had taken refuge. Police guarded the entrance as the crowd grew.

Kikuyu residents said they wanted their Luo neighbours to leave.

"They've done nothing to us," said one woman of the people taking shelter. "But their tribe is killing our people."

Former U.N. chief Kofi Annan, who is leading mediation efforts in the east African nation, has said the unrest has gone beyond a simple election dispute.

Nderi residents say his efforts will fail unless the violence can also be checked.

"The only way it will work is if the war is stopped," said one man in the crowd, who refused to be named.

Police forces tried to calm the Kikuyu crowd, which cheered as a school bus took out Luo men, women and children.

Each time the police fired teargas to disperse the mob, stone barricades and burning branches quickly returned.

"We didn't want to become violent, but they're pushing us into a corner," said Peter Muchendo, from among the crowd. (Editing by Nick Tattersall)

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