(Adds more soldiers wounded, more rockets fired)

By Nazih Siddiq

NAHR AL-BARED, Lebanon, July 25 (Reuters) - Lebanese troops advanced towards fortified positions of Islamist militants at a Palestinian refugee camp on Wednesday in what political sources said was the start of a final assault to root out the gunmen.

Moving in under cover of artillery and tank fire, soldiers killed at least four Fatah al-Islam militants at Nahr al-Bared camp in north Lebanon, raising the overall death toll from two months of fighting to at least 246, security sources said.

"This is the final phase of the military operation," one Lebanese political source said, adding that he expected the army to capture the whole camp by the end of this week.

The source said there were about 100 people left inside the area controlled by Fatah al-Islam -- 60 fighters and 40 civilians who include 24 wives of militants and 16 children.

Palestinian and U.N. officials had earlier put the number of civilians left in the hundreds. The Lebanese source said some 200 civilians had left the camp in recent days.

Witnesses said soldiers with tanks and artillery blasted the last pockets of the militants who have refused repeated calls to surrender. The fighting, which began on May 20, is Lebanon's worst internal violence since the 1975-1990 civil war.

The conflict has further undermined stability in Lebanon, already crippled by a prolonged political crisis and shaken by bombings that have killed six U.N. peacekeepers and two anti-Syrian lawmakers in the past eight months.

HEAVY SHELLING

"At its heaviest shortly after dawn, some 20 shells a minute were hitting the camp," said one witness who watched the fighting from a distance. "It was deafening."

The militants hit back, firing about a dozen Katyusha rockets into areas outside the camp. The security sources said 14 soldiers were wounded in the clashes.

The Lebanese army's slow push into the destroyed camp has cost the lives of 120 soldiers. More than 85 Fatah al-Islam fighters and 41 civilians have also been killed with 65 militants detained and charged with terrorism -- charges that carry the death penalty.

The army has consistently demanded the unconditional surrender of the militants who had attacked its positions around Nahr al-Bared on May 20, killing around 16 soldiers.

Fatah al-Islam, which espouses al Qaeda's ideology but says it has no direct links to Osama bin Laden's network, emerged last year after breaking away from a Syrian-backed Palestinian faction. It has Lebanese, Palestinians and other Arabs, including some Iraq war veterans, in its ranks.

The political sources said the military had rejected an offer from Fatah al-Islam to put its Lebanese members in charge of the group in return for safe passage of all non-Lebanese militants outside Lebanon, the deployment of a Palestinian force in the camp and the retreat of the army from the camp.

The camp housed 40,000 refugees before the fighting began. Most are now staying at other camps. Lebanon is home to some 400,000 Palestinian refugees, half of whom live in 12 camps.

The United Arab Emirates donated $5 million to be distributed to the families who fled Nahr al-Bared, officials said. Saudi Arabia had made a similar donation of $10 million weeks ago.

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