* MEND says talks mark beginning of serious dialogue

* Increased funding for Niger Delta communities on table

* Oil theft increasing since amnesty

By Nick Tattersall

LAGOS, Nov 15 (Reuters) - The main militant group in Nigeria's oil-producing Niger Delta said on Sunday it had started formal peace talks with President Umaru Yar'Adua, three weeks after reinstating a ceasefire in the region.

The Movement for the Niger Delta (MEND) said a team of representatives including Nobel Prize-winning writer Wole Soyinka and two retired senior military officers met Yar'Adua for more than two hours on Saturday.

"This meeting heralds the beginning of serious, meaningful dialogue between MEND and the Nigerian government to deal with and resolve root issues that have long been swept under the carpet," MEND said in an emailed statement.

Attacks claimed by the militant group have battered Africa's biggest energy industry over the past three years, preventing Nigeria from pumping much above two-thirds of its capacity and costing it around $1 billion a month in lost revenues.

The group and other armed factions say they are fighting for a fairer share of the oil wealth in the Niger Delta, one of the world's biggest wetlands where villages remain mired in poverty despite five decades of oil extraction by foreign firms.

But MEND has been severely weakened since its main field commanders and thousands of gunmen accepted a presidential offer of amnesty earlier this year and handed over their weapons.

The group reinstated a ceasefire three weeks ago after Yar'Adua met with Henry Okah, believed long to have been MEND's most senior commander and one of the first prominent militant figures to accept the amnesty.

MEND said Okah and Farah Dagogo, its former overall field commander, attended Saturday's talks as observers.

CASH BENEFITS

Yar'Adua last month offered to allocate 10 percent of Nigeria's oil joint ventures to Niger Delta communities, potentially providing them with hundreds of millions of dollars each year in cash benefits. [ID:nLK711860]

He also approved 200 billion naira ($1.3 billion) in federal funding to build roads, hospitals and schools in the region. [ID:nLS61406]

The amnesty programme and the pledges by government to address the underlying causes of the unrest appear to be the most serious effort yet to end instability in the Niger Delta, home to operations run by foreign firms including Royal Dutch Shell <RDSa.L>, ExxonMobil <XOM.N> and Chevron <CVX.N>.

The government says a three-month lull in violence has already helped bring back some oil and gas production.

Shell resumed operations at its Soku gas plant last week, nearly a year after it was forced to shut down because of attacks on pipelines.

But activists and sceptics fear former fighters could easily return to the creeks and resume attacks if they do not quickly find work and if politicians contesting 2011 elections again use them to intimidate voters and spark unrest. [nL5719632]

Security experts also say some former gunmen, deprived of their old livelihoods, are returning to oil theft by tapping into pipelines and smuggling the stolen crude onto the international market, a process known locally as "bunkering".

Shell said on Friday five of its oil wellheads had been attacked over the past three months by suspected thieves. [ID:nLD699153]. (For more Reuters Africa coverage and to have your say on the top issues, visit: http://af.reuters.com/ ) (Editing by Charles Dick)

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