By Matthew Goldstein

(Reuters) – Billionaire hedge fund manager Steven A. Cohen is losing the financial support of Blackstone Group Inc, the largest outside investor in his embattled SAC Capital Advisors, which is yanking much of its client money, according to a letter reviewed by Reuters.

A pension consultant, in a May 21 letter to clients, said Blackstone has notified Cohen that it intends to "fully redeem" a significant portion of the roughly $550 million the investment firm has invested with the $15 billion hedge fund. The letter from pension consulting firm Russell Investments said Blackstone submitted its redemption notice to SAC Capital sometime before May 15 because of ongoing concerns about the insider trading investigation that continues to engulf Cohen’s fund.

Blackstone’s investment with SAC Capital is through several investment funds known as hedge fund of funds and also through separately managed accounts it maintains for clients. The decision to redeem from SAC Capital impacts only client money invested in its hedge fund of funds, according to the letter. It’s not clear how much of the $550 million is in those hedge fund of funds and it is not clear what Blackstone is advising clients who have money in separately managed accounts that is invested with SAC Capital.

Russell did say in the address to its pension clients that Blackstone "expects to receive 100 percent of investors’ capital by year-end." Russell, which manages $173 billion in assets and oversees a number of index funds, also provides advice to pensions and institutional investors on where to invest their dollars in hedge funds.

The timing of Blackstone’s request to withdraw money from SAC Capital is critical because it came before the hedge fund told investors on May 17 that its cooperation with federal authorities was no longer unconditional. Soon after, news broke that federal prosecutors had issued grand jury subpoenas earlier this month to Cohen and several of his top executives, seeking their testimony about insider trading at the hedge fund.

The decision by Blackstone, which has invested with SAC Capital for at least a decade, is a big blow to the 56-year-old fund manager, who is widely regarded as one of the most successful traders of his generation. Blackstone – which manages about $46 billion in hedge fund investments for public pensions, foundations, corporations and wealthy individuals – is seen as something of a bellwether for other investors in the $2.2 trillion hedge fund industry because of its stature.

Representatives for Blackstone did not immediately respond when asked for comment on Saturday. An SAC Capital spokesman declined to comment.

The letter from Russell Investments, which was reviewed by Reuters, made no mention of the subpoenas on Cohen and his executives and was sent after a Russell representative talked to a Blackstone executive about the redemption decision. The letter said Blackstone decided to submit a redemption notice to SAC Capital after reviewing the terms of a $616 million deal SAC Capital reached in March with the U.S. Securities and Exchange Commission to settle allegations that the hedge fund’s employees had engaged in insider trading in four stocks.

Blackstone, according to the letter, said the settlement with the SEC "did not give additional comfort that the issues at-hand were resolved."

A representative for Russell Investments did not respond to a request for comment about the letter from its Russell Research division.

Outside investors in SAC Capital like Blackstone, who account for roughly $6.75 billion of the $15 billion managed by Cohen, have until June 3 to decide whether to submit redemption notices for the second quarter. In the first quarter, outside investors notified Cohen they intend to withdraw about $1.7 billion of that $6.75 billion by year’s end.

People close to SAC Capital said Cohen, who has roughly $8 billion of his money invested in SAC Capital, is bracing for another large round of redemption requests. The speculation is growing in the hedge fund world that if Cohen gets another large round of redemption requests, he may opt to return all the outside money and convert SAC Capital into a family office — an unregistered firm that manages money just for himself and his friends and family.

SAC Capital is one of the world’s larger hedge funds with 1,000 employees.

Blackstone’s hedge fund of funds invests client money with more than four dozen hedge funds, including SAC Capital, Pershing Square Capital Management, Elliott Management and DE Shaw & Co, according to people familiar with the private equity firm’s asset management business.

The decision by Blackstone to redeem comes after the private equity and investment firm has stuck with Cohen throughout the course of the long-running investigation that has so far resulted in nine one-time employees of the firm being charged or implicated in insider trading schemes.

Cohen himself has not been charged with wrongdoing, but the investigation is seen as increasingly focusing on him and his firm.

In late April, lawyers for Cohen and his firm met with federal prosecutors in Manhattan to make their best case argument about why the hedge fund billionaire and his SAC Capital Advisors should not be charged with criminal wrongdoing. But people familiar with that meeting said the lengthy presentation did not impress federal prosecutors, who are now considering whether to use a racketeering law aimed at prosecuting the Mafia and drug gangs to pursue a criminal case against Cohen’s hedge fund.

(Editing by Martin Howell and Gunna Dickson)

(Reuters) – Defense Secretary Chuck Hagel called sexual assault a "scourge" on Saturday as he addressed graduates of the U.S. Military Academy at West Point, where a sergeant stands accused of videotaping female cadets in the showers.

"Sexual harassment and sexual assault in the military are a profound betrayal – a profound betrayal – of sacred oaths and sacred trusts," Hagel said. "This scourge must be stamped out."

His comments came a day after President Barack Obama delivered a similar message to graduates at the U.S. Naval Academy, saying sexual assault threatened to erode trust and discipline in America’s armed forces.

The Pentagon is reeling from a series of sex-related scandals in recent weeks, including cases in which military advocates for victims of sexual assault were themselves accused of sex crimes.

A study released by the Defense Department two weeks ago estimated that reports of unwanted sexual contact in the military, from groping to rape, rose 37 percent in 2012, to about 26,000 cases from 19,000 the previous year.

At West Point in New York state, Sergeant First Class Michael McClendon was charged last week with four counts, including indecent acts, dereliction of duty and cruelty, the Army said.

McClendon had served as a tactical non-commissioned officer at the academy since 2009, a job that put him in charge of mentoring and training a company of about 121 cadets.

The incidents have embarrassed the U.S. military and prompted members of Congress to introduce legislation designed to toughen up the Pentagon’s handling of sex crimes.

Hagel, in his address, noted that budget cuts were impacting military readiness and morale. But he cited sexual assault and sexual harassment among other, growing threats to America’s all-volunteer force.

"You will need to not just deal with these debilitating, insidious and destructive forces but rather you must be the generation of leaders that stop it," he said.

(Reporting by Phil Stewart in Washington; Editing by Eric Beech)

By Peter Griffiths

LONDON (Reuters) – British police arrested a man under anti-terrorism laws at BBC headquarters after an interviewee said security services tried to recruit one of the two men arrested after a soldier was hacked to death in a London street.

Michael Adebolajo, 28 and Michael Adebowale, 22, are under armed guard in hospital after being shot and arrested by police on suspicion of the murder of 25-year-old Lee Rigby, a veteran of the Afghan war, on Wednesday.

A man identified by the BBC as Abu Nusaybah told its flagship news program "Newsnight" that intelligence officers had approached Adebolajo six months ago to see if he would work for them as an informant. He said Adebolajo had refused.

BBC reporter Richard Watson, who conducted the interview, said police were waiting to arrest Nusaybah after the interview had finished on Friday. The pre-recorded interview was broadcast later that evening.

London’s Metropolitan Police said counter-terrorism officers had arrested a 31-year-old man at 2030 GMT on "suspicion of the commission, preparation or instigation of acts of terrorism".

A police spokesman said the arrest was made at the BBC building, but did not confirm the man’s identity. He also said the arrest was not directly linked to the soldier’s murder. He would not comment on the BBC interview.

A source close to the investigation told Reuters earlier this week that both men suspected to have attacked the soldier were known to Britain’s MI5 internal security service. However, intelligence officers thought neither man posed a serious threat.

PARLIAMENTARY INQUIRY

Prime Minister David Cameron has said a parliamentary committee will investigate the security services’ role.

In his BBC interview, Nusaybah alleged that intelligence officers visited Adebolajo’s London home after the suspect made a trip to Kenya last year.

Nusaybah said his friend had been arrested and questioned in Kenya. This assertion was dismissed by the Kenyan government as a "fairy tale".

"He mentioned initially they (MI5) wanted to ask him if he knew certain individuals," Nusaybah told the BBC. "But after him saying that he didn’t know these individuals, what he said was they asked him if he would be interested in working for them. He refused to work for them."

Asked about Nusaybah’s comments, a Home Office (interior ministry) spokesman said it never commented on security matters.

A Kenyan government spokesman said it had no record of Adebolajo ever visiting the east African country.

"We have never arrested him and we have never interrogated him, because if we had arrested him, we would never have let him go because of our experience of international terrorism," the spokesman said.

"Our conclusion is that this man is an imposter and a charlatan and wants to tarnish the image of our country."

Three days after the soldier’s killing, police have yet to bring any charges. Police said Adebolajo and Adebowale are in a stable condition in hospital. The pair were in "no fit state" to be questioned by police, a government source was quoted as saying in the Times newspaper.

Witnesses said two men used a car to run down Rigby outside Woolwich Barracks in southeast London and then attacked him with a meat cleaver and knives, before being shot by police.

The pair told bystanders they were acting in revenge for British wars in Muslim countries.

(Additional reporting by Drazen Jorgic in Nairobi; Editing by Mark Heinrich)

By Tim Gaynor

NACO, Mexico (Reuters) – Mexican activist Maria Elena Borquez takes up a paintbrush and daubs a bright splotch of color on the rusted steel fence separating the small Mexican town of Naco from a neighboring town in the United States.

"The wall projects hostility," she said, paint pot in hand and surrounded by youngsters from both the United States and Mexico. "The idea is to transform it with art, friendship, colors and life … into something that unites us," said Borquez, who is director of the local museum.

As the United States pushes for tighter security along the Mexico border as part of efforts to overhaul immigration laws, Borquez is among scores of residents on either side of the border in this corner of southeast Arizona taking the unusual step of working to strengthen neighborly ties.

The project, with a group calling itself the "Border Bedazzlers," was founded last year by Gretchen Baer, a painter in the former copper mining town of Bisbee about 5 miles north of the border.

Bisbee, with 5,600 residents, is hardly a typical town – a local bumper sticker describes it as a "liberal oasis in a conservative desert" – in its community outreach.

A Rasmussen Reports poll found last month that the majority of likely American voters (57 percent) thought the United States should continue building a border fence along the nearly 2,000-mile (3,200-km) border.

There are also periodic flare-ups over civilian volunteers looking for unauthorized border crossers and Mexico’s outrage after Arizona passed a 2010 law that required police to question those they stopped, and suspected of being in the country illegally, about their immigration status.

"As the U.S. is pumping up all this security on the border and more and more money is being spent on all of this ‘keep them out,’ people want to respond in a positive way and say ‘That’s not us,’" said Baer.

CLINICS AND GREENHOUSES

One example of a positive response is Casa Saludables, a free clinic offering Naco residents healthcare services such as health checkups, blood pressure, eye exams and diabetes tests.

There’s also a collaborative garden. Victor Acedo, a Bisbee bartender and trained horticulturist, is helping Naco residents grow fresh food for children at the local Casa Hogar orphanage, a few hundred yards south of the rusted border fence.

He and other volunteers built a greenhouse out of old car tires and a trampoline frame to grow crops ranging from celery, onions and chilies to carrots, cabbage and chard. The produce helps feed half-a-dozen youngsters aged eight to 21.

Mexican handyman Francisco Corona, who is learning from Acedo how to tend plants and improve the soil via vermiculture – worms – says it has become "really important" to the youngsters.

"It gives them somewhere to enjoy themselves after school. They come, they look and see if it needs watering, they plant seeds, they ask if the plants have come up," said Corona, who is now building a second greenhouse out of discarded soft-drink bottles.

TWINNING LINK

City authorities say the Bisbee-Naco ties have been aided by their relative isolation, low waiting times at the border crossing in Naco, and a can-do attitude of residents.

"We don’t worry so much, on either side, about politics or where we came from," said Bisbee Mayor Adriana Badal. "We don’t get bogged down with bureaucratic stuff … we say ‘OK, I have this project and you have a need, so let’s just work together.’"

Badal is now seeking a sister-city agreement with Naco, which would enable the two to step up cultural and economic ties and put their projects on a more formal footing.

Other local initiatives are in the works, including a plan by Jesus Morales, the fire chief in tiny unincorporated Naco, Arizona, to create a food bank over the line with counterparts in its Mexican namesake, where a majority of people live in poverty.

"There’s families still sleeping on dirt floors over there," said Morales. "We have to look out for the old or the vulnerable, whether they are here or wherever. It is the humane way to be."

(Editing by Dave Graham, Arlene Getz and Philip Barbara)

By Malia Mattoch McManus

HONOLULU (Reuters) – The city of Detroit may be facing a deepening financial crisis but that hasn’t stopped four trustees of its public pension funds from spending $22,000 of retirement system funds to attend a conference in Hawaii this week.

The trip 4,500 miles west to a four-star resort on the world-famous Waikiki Beach in Honolulu doesn’t sit well with the top officials now running Detroit’s finances under an emergency order from the state of Michigan. Emergency Manager Kevyn Orr has not ruled out a bankruptcy as the city struggles under a $15 billion debt burden, which is being strained further by its hefty pension obligations.

"It especially doesn’t look good when you have city employees, police, firefighters having taken pay cuts," said Bill Nowling, spokesman for Orr. "Middle-class, blue-collar workers, their dream vacation when they retire may be a two-week trip to Hawaii – they don’t associate Hawaii with a place you go to work."

The four trustees from Detroit were among hundreds of pension officials from around the country who traveled in the past week to Honolulu for the annual convention of the National Conference on Public Employee Retirement Systems. Nowling said that Orr’s team did not think they had the power to prevent the trip.

John Riehl, a senior sewage plant operator and 34-year Detroit employee, is one of the four. The cost fell within continuing education guidelines set by the legislature, he said.

"It’s one of these things we trustees must do to stay on top of the field," Riehl said. "It’s important that we participate in these conferences. The stakes are too high."

Of the three other trustees from Detroit, one declined to comment and two others could not be reached for comment.

NOT A VACATION

The two delegates from the Detroit Police and Fire Retirement System attended for business, not pleasure, the fund’s spokesman Bruce Babiarz told Reuters. "These are intelligent folks there to do a job, not there to vacation."

The two trustees from Detroit’s General Retirement System, including Riehl, attended because the knowledge gained "will assist them in prudently executing their fiduciary responsibilities/obligations," spokeswoman Andrea Kenski said in a statement.

Usually the conference captures little outside attention. This year, though, it has faced criticism for its choice of venue, the Hilton Hawaiian Village Waikiki Beach Resort with its five-acre salt-water lagoon, five swimming pools, and flamingos, penguins and turtles.

Some funds boycotted the event, saying it sent the wrong message, particularly at a time when many pension systems face funding shortfalls and the finances of the cities and states that sponsor them remain on shaky ground.

BOOKED BEFORE THE CRISIS

The criticism irks Hank Kim, the conference organizer’s executive director.

"It was completely unfair," Kim said. "The coverage was, ‘It’s Hawaii.’ It’s blatantly inappropriate."

The decision to hold it in Hawaii was made before the financial crisis thrashed the portfolios of the nation’s public pensions and raised continuing concerns about their long-term obligations, how to meet them and who should pay.

Last year, the group held the conference in New York, where room costs were nearly twice the Honolulu rate, Kim said.

Among those attending is Shawn Curry, a homicide detective and trustee for the $144 million Peoria Police Pension Fund in Illinois, who said it was cheaper than New York. "Our fund decided last year not to send anyone because the costs in New York were so high. When we looked at this year, there was so much of a cost savings we decided to come."

"The only negative is the airfare," said George Mitchell, chairman of Florida’s Pompano Beach General Employees’ Retirement System, with $139 million in assets. "The hotel is very reasonable and has everything you need, so you don’t have rent a car and get everywhere in taxis."

MINDING APPEARANCES

Not everyone came on their fund’s dime.

Michael Grodi, chairman of Michigan’s $183 million Monroe County Employees Retirement System, attended thanks to a grant from the organizers because the fund would not cover the cost.

"The appearance was just not good," Monroe County Administrator Michael Bosanac said of the decision not to send Grodi at the fund’s expense. "It doesn’t conjure up the image of a hard-working conference."

"These are not junkets," Grodi countered. "We are getting educated to make decisions and have huge responsibilities."

Among the conference’s sessions were panels to help reframe the pension funding debate and justify the assumptions that dictate funding levels, which have come under increasing scrutiny in recent years.

One well-attended session covered how to avoid front-page scandals. According to presenter Lydia Lee, a pension attorney from Oklahoma, the session touched on a topic familiar back in Detroit: The indictment this spring of two former city pension officials for an alleged $200 million bribery and kickback scheme, in a case that will come to trial next March.

(Writing additional reporting by Jim Christie in San Francisco; Editing by Dan Burns, Martin Howell and Claudia Parsons)

KIEV (Reuters) – About 100 Ukrainian gay rights activists held the country’s first gay rally on Saturday, helped by police who arrested 13 people for trying to break up the march.

The activists walked for about 250 meters (yards) along Victory Avenue in the capital Kiev while Orthodox Christian activists nearby chanted slogans denouncing them.

"Ukraine is not America. Kiev is not Sodom,’ shouted one anti-gay demonstrator over a loudspeaker.

A church activist broke through the police cordon briefly and slapped down banners calling for an end to discrimination against homosexuals before he was seized by police.

There is little public acceptance of homosexuality in predominantly Orthodox Ukraine, as in other former Soviet republics. On May 17, large crowds of protesters broke up gay rights rallies in Georgia and Russia.

The march in Kiev lasted only 40 minutes but was a small victory for the former Soviet republic’s gay community.

A year ago, gay activists canceled plans for a rally in Kiev, saying they had received threats of violence. One would-be organizer was beaten up by a group of men the same day.

Organizers hailed the march on Saturday as a breakthrough.

"This event will go down in the history of Ukraine as one of the key developments in the fight for equal human rights," said Olena Semenova, one of the organizers, expressing gratitude to the police and the authorities for their action.

The rally almost came to nothing when city authorities raised security concerns and a court issued an order to ban it.

But on Saturday police offered protection to the small march, held away from the city center.

Church activist Ioksana Keresten, who protested against the rally, said: "We are trying to protect family values. We want to protect our children from homosexual propaganda. This parade popularizes homosexuality. It can influence our children for their whole life."

At the end of the rally, the gay activists stepped into the grounds of a local film studio and climbed onto buses that drove them away, avoiding the risk of further confrontation.

Ukraine’s parliament last year shelved the second reading of a bill that would have criminalized the "promotion of homosexuality". But it has also delayed passing legislation to outlaw discrimination against homosexuals in the workplace.

(Additional reporting by Mykhailo Yelchev of Reuters television and Gleb Garanich of Reuters pictures; writing By Richard Balmforth; editing by Tom Pfeiffer)

By Khaled Yacoub Oweis

ISTANBUL (Reuters) – Syria’s opposition resumed talks on Saturday aimed at closing their fractious ranks, crucial to launching an international peace conference, and government forces pressed an onslaught on a rebel-held town to try to gain the upper hand in civil war.

Failure of the opposition to unite could weaken the hand of conference co-sponsors Russia and the United States in ending Syria’s conflict, which has killed 80,000 people, threatens to spill across borders and whip up wider sectarian conflict.

The U.S. and Russian foreign ministers are to meet in Paris on Monday to discuss how to shepherd Syrian President Bashar al-Assad and the opposition into peace talks in Geneva the two world powers have jointly proposed.

As opposition leaders met in Istanbul, Assad’s forces reinforced by Lebanese Hezbollah fighters unleashed heavy artillery and tank fire to try to seize more rebel terrain in the border town of Qusair on Saturday, sources on both sides said.

More than 22 people in opposition-held areas were killed by Saturday afternoon, most of them rebels, and dozens were wounded, according to the Syrian Observatory for Human Rights.

Assad’s forces are believed to have seized about two-thirds of Qusair and largely surrounded the rebels. But the price was high and rebels insisted they were preventing further advances.

An official close to Hezbollah told Reuters: "We are in the second phase of our plan of attack but the advance has been quite slow and difficult. The rebels have mined everything, the streets, the houses. Even the refrigerators are mined."

The insurgents see Qusair as a critical battle to preserve cross-border supply lines and deny Assad a victory they fear may give him the edge in the prospective peace talks next month.

Sources at the Syrian National Coalition (SNC), which began its third day of meetings, said major players would now focus on international demands for a broadening of the Islamist-dominated group, leaving leadership issues for later.

Attempts to strike a grand bargain involving veteran liberal campaigner Michel Kilo and businessman Mustafa al-Sabbagh, Qatar’s point man in the coalition, went nowhere in talks that stretched overnight, senior coalition sources said.

"We are back to square one," one of them told Reuters.

On the sidelines of an African Union summit in Addis Ababa, U.S. Secretary of State John Kerry appealed to U.N. Secretary General Ban Ki-moon "to try to get something moving with respect to Syria", according to a pool reporter. Ban told Kerry he and his special Syria envoy Lakhdar Brahimi "are working very hard to convene, to make this Geneva conference a success."

Concerned by the rising influence of hardline Islamists, the United States has pressed the opposition coalition to resolve its divisions and bring more liberals into the fold.

Saudi Arabia, the most powerful Arab adversary of Assad, has agreed to play a more active role in furthering the coalition cause, diplomats and coalition members said.

CLASHING SAUDI, RUSSIAN PRIORITIES

Saudi Arabia, the sources said, will want to see the Geneva conference, which could convene in the next few weeks, put the exit of Assad at the top of the agenda.

But they said Russia, a longtime ally of Assad, wanted it to focus on a ceasefire although there is scant rapport between opposition politicians abroad and rebels inside Syria.

The inability of the coalition to alter its Islamist-dominated membership as demanded by international backers and replace a leadership undermined by power struggles is playing into the hands of Assad who, according to Russia, intends to send representatives to the peace conference.

"The coalition risks undermining itself to the point that its backers may have to look quickly for an alternative with enough credibility on the ground to go to Geneva," a senior opposition source at the talks said.

Senior opposition figures said the coalition was likely to attend the conference, but doubted the meeting would secure their central demand – an immediate deal for Assad to quit.

While the opposition remained riven by differences, the assault by Assad’s forces and their Shi’ite Muslim Hezbollah allies on Qusair, a Sunni town near Lebanon over the past week, is evolving into a pivotal battle.

Qusair controls access to Syria’s Mediterranean coast, the heartland of Assad’s minority Alawite community, and the battle may prove a weighty test of his ability to withstand the revolt.

Assad is backed by Shi’ite Iran and Hezbollah against the mainly Sunni rebels supported by Saudi Arabia and Qatar.

Hezbollah’s intervention is hardening fears that the civil war will cross borders at the volatile heart of the Middle East.

"It is ironic that Lebanon’s civil strife is playing itself out in Syria. The opposition remains without coherence and the regime is intent on taking back anything it promises with violence," said one diplomat.

The diplomat was referring to a deepening sectarian divide between Shi’ite and Sunni Muslims in Lebanon, where Syrian troops were present for 29 years, including for most of the Lebanese civil war that ended in 1990.

The death toll in the northern Lebanese city of Tripoli reached 25 on Saturday in the seventh straight day of clashes between Alawite and Sunni factions backing opposing sides in Syria’s war, security sources said.

(Additional reporting by Erika Solomon in Beirut and Arshad Mohammed in Addis Ababa; Editing by Mark Heinrich)

Dagestan, an ethnically mixed, mostly Muslim region between Chechnya and the Caspian Sea, has become the most violent province in the North Caucasus, where insurgents say they are fighting to carve out an Islamic state out of southern Russia.

The bomb was detonated after police stopped the car to check the driver’s documents, some 100 meters from the regional police ministry in the center of Makhachkala, the regional capital.

Police sources told local media the only person killed was the bomber, whom they identified as the former wife of two militants. It is not unusual for women to carry out suicide bombings in the region. They are often the widows of militants.

Two policemen injured in the blast were in a critical condition, police said, with nine other people requiring hospital treatment.

There has been a surge in violence in the region in recent weeks. The latest attack comes days after two car bombs in Makhachkala killed four people and injured dozens more on Monday.

At least 405 people were killed in Dagestan in violence linked to the insurgency last year, according to the Caucasian Knot website, which tracks developments in the region.

Russian President Vladimir Putin has ordered law enforcement authorities to ensure insurgents do not attack the 2014 Winter Olympics next February in the Black Sea resort city of Sochi, which is close to the North Caucasus.

(Reporting by Jason Bush; Editing by Alison Williams)

By Erika Solomon

BEIRUT (Reuters) – Syrian government forces and the Lebanese guerrilla group Hezbollah launched a fierce campaign to seize more rebel territory in the border town of Qusair on Saturday, sources on both sides of the conflict said.

Rebels fighting to topple President Bashar al-Assad said additional tanks and artillery had been deployed around opposition-held territory in Qusair, a Syrian town close to the Lebanese border.

"I’ve never seen a day like this since the battle started," said Malek Ammar, an activist speaking from the town by Skype. "The shelling is so violent and heavy. It’s like they’re trying to destroy the city house by house."

More than 22 people in opposition-held areas were killed by Saturday afternoon, most of them rebels, and dozens were injured, according to the Syrian Observatory for Human Rights.

Rebels are largely surrounded in Qusair, a town of 30,000 that has become a strategic battleground. Assad’s forces want to take the area to secure a route between the capital Damascus and his stronghold on the Mediterranean coast, effectively dividing rebel-held territories in the north and south.

The opposition has been fighting back, seeing it as critical to maintain cross-border supply routes and stop Assad from gaining a victory they fear may give him the upper hand in proposed U.S.-Russia led peace talks next month.

Syria’s two-year uprising against four decades of Assad family rule began as peaceful protests but devolved into an armed conflict that has killed more than 80,000 people.

Assad’s forces are believed to have seized about two-thirds of Qusair, but the price has been high and rebels insist they are preventing any further advances.

An official close to Hezbollah told Reuters that the fighters’ advances in Qusair were happening at a very slow pace.

"We are in the second phase of our plan of attack but the advance has been quite slow and difficult. The rebels have mined everything, the streets, the houses. Even the refrigerators are mined."

Assad and Hezbollah forces have also been working to capture territory in areas surrounding Qusair. Manar TV, Hezbollah’s media wing, said the Syrian army recaptured the Dabaa airport near the town, which rebels had seized several weeks ago.

SECTARIAN FIGHTING THREATENS REGION

The fighting in Qusair has also highlighted the increasingly sectarian tone of Syria’s political struggle, which is not only overshadowing the revolt but threatening to destabilize the region. Israel has launched two air strikes in Syria, and Lebanon, which fought its own sectarian-fuelled 15-year civil war, has seen a rise in Syria-linked violence.

Syria’s Sunni Muslim majority has led the struggle to topple Assad, and has been joined by Islamist fighters across the region, some of them linked to the militant group al Qaeda.

Assad comes from the minority Alawite sect, an offshoot of Shi’ite Islam, and has relied on an army led mostly by Alawite forces. He has been bankrolled by regional Shi’ite power Iran, a longtime ally, and now increasingly by the country’s Lebanese proxy, Shi’ite Hezbollah, founded as a resistance movement to Israel.

Syrian rebels now say that whatever the outcome, they will plot sectarian revenge attacks on Shi’ite and Alawite villages on either side of the border.

The Britain-based Syrian Observatory, which has a network of activists across Syria, said Assad forces led by Hezbollah were trying to advance from three directions in the city.

"Every area they didn’t have a foothold in, they are trying to gain one now," Rami Abdelraham, head of the Observatory, told Reuters by telephone.

Rebels from across Syria say they have sent some of their units into Qusair.

Colonel Abdeljabbar al-Okaidi, the Aleppo-based regional leader of a moderate, internationally-backed Supreme Military Council said he and the Islamist brigade al-Tawheed had sent forces to the outskirts of the town to help the Qusair fighters.

But activist Malek Ammar said no forces had arrived yet and insisted the rebels locked in Qusair were still on their own.

"No one is helping Qusair other than its own men," he said.

(This story has been corrected to change source of Hezbollah information to official, paragraph nine)

(Additional reporting by Laila Bassam; Editing by Sonya Hepinstall)

ISLAMABAD (Reuters) – Seventeen Pakistani children burnt to death on Saturday when a gas cylinder on the bus taking them to school exploded, media said.

Ten children were injured in the blaze on the outskirts of Gujrat, 100 miles southeast of Islamabad, DawnNews said.

Many vehicles in energy-starved Pakistan are powered by relatively cheap compressed natural gas and cylinder blasts are common.

(Reporting by Nick Macfie; Editing by Ron Popeski)