By day, the tiny rebel capital of South Ossetia and the villages nearby are often quiet. But, by night, they crackle with gun and mortar fire. The old men who pause under shady trees in Tskhinvali look like pensioners anywhere, passing time and reminiscing. But here they talk of weapons, killing and the prospect of war.

Legally part of Georgia, most of the territory is run by separatists who want to unite with their ethnic kin in Russian-controlled North Ossetia.

"From the Soviet days the Georgians always discriminated against us," says Lev Gogichaev. "Then in the 1990s they opened their prisons and sent convicts, police and soldiers to fight us. But we drove them out. Now they seem ready to attack us again, but we're not scared. There are no cowards here." . His friends murmur agreement.

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At least 2,000 people are thought to have died in 1991-92, when Georgia deployed troops to crush South Ossetia's bid to break free of Tbilisi's control. Now, after a 16-year stand-off, and with Russia furious at Georgia's bid for Nato membership, talk of renewed conflict is growing louder. South Ossetia says it is evacuating hundreds of children to North Ossetia after Georgian sniper and mortar fire killed six people and injured 15 others last weekend. Tbilisi denies using such weapons, and insists the children are simply going to the same summer camps that they attend every year.

Moscow, relied upon by Tskhinvali and deeply mistrusted by Georgia, has warned of "large-scale military action" and said yesterday that it would "not remain indifferent" to any danger posed to the vast majority of South Ossetians who have been given Russian passports.

The region, home to perhaps 40,000 people, is a patchwork of Georgian and Ossetian villages, guarded by troops and militia who regularly exchange fire. It has been called a "bloody little chessboard" – and the pieces upon it often seem guided by powerful foreign hands. Last summer, a Russian plane allegedly bombed Georgian territory close to South Ossetia and, last month, hours before the US Secretary of State, Condoleezza Rice, visited Tbilisi, four Russian fighter jets circled over Tskhinvali.

Temur Iakobashvili, Georgia's minister for re-integrating its separatist regions, South Ossetia and Abkhazia, said: "Russia's initial aim was to retaliate over Kosovo [claiming independence] and to stop Georgia joining Nato and, when the West showed its incapacity to act, Russia saw the possibility finally to annex these territories and redraw the borders of eastern Europe."

He argues that Russia will undermine Georgia until it is formally placed on the path towards Nato membership, and he wants more US and EU involvement in security missions and negotiations in its breakaway provinces.

In the dilapidated government headquarters of separatist South Ossetia, Boris Chochiev, the deputy prime minister, hails Russia and condemns Georgia and its Western backers. "All we see is Georgia preparing for another war," he said. "But we wouldn't be alone. It would be a war of the Caucasian peoples against Georgia, and Russia would be obliged to protect its citizens."

Much responsibility for monitoring the region falls to the Organisation for Security and Co-operation in Europe, which also runs economic projects that encourage South Ossetians and Georgians to work together – often with startling success.

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"At a local level, Georgians and South Ossetians can get on and want to live their lives in peace," said Steve Young, the Briton who is the OSCE's chief military representative in Georgia. "But as regards the military situation ... if [tension] continues to rise then there is the potential for a deterioration into some form of armed conflict."

Few officials in Tbilisi, Tskhinvali or Moscow would disagree. "We don't want war. But we won't give up one centimetre of our territory to anyone," vows Mr Iakobashvili. And in his office 60 miles to the north, Mr Chochiev insists: "There's no way back. We were part of the USSR, not Georgia. And now we want to rejoin our people."

Roots of conflict stretch back to Stalin

*Most Ossetians are Orthodox Christians, and live on the northern and southern slopes of the Caucasus mountains. Russia controls North Ossetia; South Ossetia is legally part of Georgia, but most of it is run by a rebel government that wants to unite with the north.

*Stalin divided Ossetia between the Russian and Georgian Soviet Republics in 1922, despite protests from the Ossetians.

*Calls for reunification grew louder as the Soviet Union weakened and finally collapsed, and nationalism intensified in Georgia. Tbilisi sent troops to crush the rebellion, sparking a war in 1991-92, in which at least 2,000 people are thought to have died and thousands were driven from their homes. Russia covertly supported the rebels, and ultimately helped shape a peacekeeping deal for the region.

*Georgia says the peacekeeping format is being abused by Russia, which it accuses of financing and arming the breakaway government. Tbilisi says Moscow is destabilising South Ossetia and another breakaway region, Abkhazia on the Black Sea, to maintain influence in the Caucasus and undermine Georgia's bid to join Nato. Both areas, Georgia says, are rife with smuggling of arms, drugs and people.

*South Ossetian officials claim 65,000 people live in the territory; Georgia puts the figure nearer 20,000.