By Fadel Badran

Fallujah - Fighting erupted in Fallujah overnight in the first major breach of an informal truce in the town where more than 600 Iraqis were reported killed in a week of battles between United States Marines and Sunni Muslim rebels.

Residents heard blasts and gunfire from one area of Fallujah for three hours before dawn as US helicopters flew overhead. Iraqi fighters blamed the Americans for breaking the ceasefire.

They said they remained ready to meet Iraqi mediators on Monday morning to try to shore up the truce, which gave the battered town some respite during the weekend.

The US military has said it is prepared to "resume offensive operations" unless the talks make progress.

Three Marines were killed in combat west of Baghdad on Sunday, the US military said, bringing to at least 470 the number of American troops killed in action during the Iraq invasion.

US forces have tried to crush a stubborn Sunni insurgency in central Iraq, while battling a new revolt by Shi'a rebels led by fiery cleric Moqtada al-Sadr across much of the south.

In reprisal, insurgents have kidnapped or killed more than a score of foreigners, though some hostages have been released.

Seven Chinese were abducted on Sunday but a British contractor held for six days was released. A masked man said on a videotape eight other hostages - three Pakistanis, two Turks, an Indian, a Nepalese and a Filipino - had been freed.

An unidentified negotiator told Japan that three kidnapped Japanese civilians were safe but still being held by guerrillas who abducted them last week, the Kyodo news agency reported.

Their captors have threatened to kill them unless Japan withdraws its troops from Iraq. Tokyo has rejected the demand.

Many Iraqis, including some members of the US-appointed Governing Council, have been shocked at the ferocity of the past week's violence in Fallujah, 50km west of Baghdad.

Rafa Hayad al-Issawi, director of Fallujah's main hospital, said he believed more than 600 Iraqis had been killed in the town. "The number may not be absolutely accurate because many families have already buried their dead in their gardens."

The US military has reported losing 14 dead over the weekend, including the two-man crew of an Apache attack helicopter shot down near Baghdad airport on Sunday.

"It was a tough week," President George Bush said of Iraq's bloodiest period since Saddam Hussein's fall.

"I pray every day there are less casualties, but I know what we are doing in Iraq is right, right for long-term peace, right for the security of our country," he said at Fort Hood, Texas, where he prayed with US troops on Easter Sunday.

The US military said on Sunday that Marines had called in air strikes on a cave where 16 insurgents had taken cover near Fallujah after firing on the Americans.

It said Marines had also killed about a dozen fighters who ambushed a military convoy near the Syrian border.

The Marines attacked rebels in Fallujah in the past week in response to the murder and mutilation of four American private security guards ambushed in the town on March 31.

Guerrillas holding a US civilian, Thomas Hamill, said they would execute him unless the US siege of the town was lifted.

China's official Xinhua news agency quoted a Chinese diplomat as saying seven Chinese men, aged 18 to 49, had been kidnapped by armed men in central Iraq, probably in Falluja. They had entered Iraq via Jordan on Sunday morning.

The freed British contractor, Gary Teeley, 37, who had been missing since last Monday, was handed over to US-led occupying forces.

An Italian army officer in the southern city of Nassiriya said efforts to free Teeley had involved an attack on the local office of Sadr's militia, pressure and negotiation.

The Arabic television station al-Jazeera broadcast the video tape in which the masked man said the eight foreign hostages, described as truck drivers, had been released.

"We have released them in response to a call from the Muslim Clerics Association after we were sure that they will not deal with the occupation forces again," the man said on the tape.

In the northern city of Kirkuk, a mortar bomb believed to have been aimed at a US military base killed two Iraqis and wounded three, Iraqi police captain Tahsin Ali said.