The Taliban dug into defensive positions in a cluster of villages near Kandahar yesterday in apparent preparation for a battle on the doorstep of Afghanistan's second city.

The brazen gambit came days after the Taliban smashed into Kandahar's main prison, freeing 400 militants, and deepening the sense of crisis in the country.

Local elders said fighters had flooded into Arghandab, a rural sprawl of farmhouses and vineyards that stretches north-west of Kandahar city. "They have blown up several bridges and are planting mines everywhere," Muhammad Usman, a taxi driver who had evacuated a family, told reporters in Kandahar.

The Afghan army flew 700 soldiers into Kandahar and Nato redeployed Canadian soldiers in response to the Taliban actions. But the US-led coalition - which operates under a separate chain of command - disputed the seriousness of the threat, saying it had deployed a patrol to Arghandab and found "no evidence that militants control the area".

A Nato spokesman, Mark Laity, said the alliance had a "very mixed picture" about the size of the buildup. "We assume insurgents are there but we have little evidence of hundreds. You have some displaced people who are panicky, some bad guys who are exaggerating and so it's hard to know what is happening," he said.

Laity said Nato aircraft had dropped leaflets on the area urging residents to stay indoors. "We're emphasising potential threats," he said.

The Taliban have long prized Arghandab, whose pomegranate orchards and vineyards make for ideal guerrilla fighting ground. Soviet troops never managed to capture the area during the 10-year occupation that ended in 1989. But it has been vulnerable since the death last year of two leaders of the local Alokozai tribe, Mullah Naqibullah and Abdul Hakim Jan - one from a heart attack, the other in a suicide bombing.

Since then the Taliban have gradually infiltrated the area, but any attempt to establish complete control could exact a high price. A similar move in Panjwayi, west of Kandahar, in late 2006 sparked a punishing Nato offensive that killed hundreds of fighters and forced many more to flee towards the Pakistani border.

Whatever its size, the latest manoeuvre shows that despite the presence of 65,000 foreign soldiers - the greatest number since 2001 - the Taliban can still produce surprises. One commander, Mullah Ahmedullah, said escaped prisoners from Friday night's jailbreak were among their ranks.

"We've occupied most of the area and it's a good place for fighting. Now we are waiting for the Nato and Afghan forces," he told the Associated Press.

The jailbreak was a severe embarrassment for President Hamid Karzai and underlined his government's failure to provide security. Kandahar is under the control of his brother, Ahmed Wali, who heads the provincial council and wields much influence.

Karzai deflected criticism on to neighbouring Pakistan, warning on Sunday he would send troops to kill Taliban leaders sheltering in the tribal areas and North-West Frontier province. Pakistan said it would not tolerate any incursion.