SANAA, Sept 20 (Reuters) - Yemen's president on Sunday accused northern rebels of killing innocent civilians and using "human shields", in an address carried in state media.

Yemenis of the Shi'ite Zaydi sect have been locked in battle with government forces since the army launched "operation scorched earth" in August in Saada and Amran provinces.

Rebel leader Abdul-Malik al-Houthi, in comments published in Saudi daily Asharq al-Awsat, rejected a key demand that the rebels stop hiding in the mountains of the north, saying this would amount to removing them from their lands.

There were reports of limited fighting on Sunday, the first day of the Muslim holiday of Eid al-Fitr marking the end of the fasting month of Ramadan.

Last week dozens of civilians were reported killed in two army air raids, sparking condemnation from aid organisations and Yemeni rights groups. The United Nations top human rights official called on Sanaa to meet its obligations to civilians.

In his address to mark the Eid, President Ali Abdullah Saleh said the Shi'ite rebels, referred to as Houthis after their leaders' clan, had ignored a ceasefire offer.

"We hoped this offer would not be met with escalation including kidnapping, killing innocent citizens and using them as human shields," he said.

A military spokesman also accused the Houthis of using "human shields" in a statement responding to footage published by the rebels appearing to show children killed in last week's air raid. He said the images were a "fabrication".

The government in Sanaa says the rebels want to restore a Shi'ite state that fell in the 1960s and accuse Shi'ite power Iran of maintaining contacts with them.

The rebels say they want autonomy and accuse Saleh of despotism and corruption in a drive to stay in power, as well as introducing Sunni fundamentalism via his alliance with Riyadh.

Their leader rejected a demand that they stop hiding in the mountains of the north.

Abdul-Malik al-Houthi told the Saudi daily: "Most of the places where we live are in the mountain areas, so do they want to move us from there? We cannot accept this.

"We have said that if the authorities stop targeting us, we will stop barricading (ourselves in the mountains)."

U.N. aid agencies say about 150,000 people have been made refugees since the fighting first began in 2004, with thousands staying in official and make-shift camps.

Media have had difficulty accessing the conflict zone and verifying conflicting reports from each side. (Reporting by Andrew Hammond; Editing by Janet Lawrence)

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