At refugee camps, reports are flooding in of horrific human rights abuses in a country once famous for its music and joyous lifestyle. Mark Townsend reports on the jihadist nightmare in the Sahel

They were told to assemble in Gao's market place at dusk. A man accused of using tobacco was escorted before the crowd by several members of the al-Qaida splinter group Movement for Tawhid and Jihad in West Africa.

"Then they chopped off his hand. They wanted to show us what they could do," said Ahmed, 39, a meat trader from the town in northern Mali.

That was not the end of it. The severed hand was tossed into a vat of boiling water. Then, according to Ahmed, the man was pinned down and over the next hour the bent, misshapen hand was sewn crudely back onto his stump. Ahmed, too terrified to disclose his full name, fled Gao the next day, 8 November: "I had to go. I could not live my life."

Fresh witness accounts such as this, from people arriving smothered in the red Sahel dust that clogs every pore at the refugee camps straddling the border with Burkina Faso, suggest that the situation in northern Mali is deteriorating fast. Given the dangerous situation in the region, it was impossible to verify the accounts, but they were numerous and disturbing.

Credit: Observer graphics

Islamist militants who seized control of an area larger than the UK six months ago have imposed their ultra-conservative brand of sharia law. The tales recounted suggest a population subjugated by a regime well versed in appalling brutality. Allegations of war crimes include summary executions, mass rape, racism and the targeting of elders by child soldiers recruited by the extremists. Some allege that child soldiers are being forced to rape women.

Analysts warn that the crisis in Mali threatens to destabilise the entire Sahel region, the belt of Africa immediately south of the Sahara where 19 million people live on the edge of malnutrition. The arrival of Islamic terrorists against this backdrop saw the United Nations last Monday describe Mali as "one of the potentially most explosive corners of the world". Within 24 hours, the country's prime minister was forced by the military to resign , further complicating any attempts to reclaim northern Mali.

Ahmed, from Gao, Mali, witnessed Islamic extremists trying to sew a shrivelled hand onto a man as punishment. Photograph: Mark Townsend for the Observer

Last week refugees told how the Islamists – an amalgam of militant extremists Ansar Dine, al-Qaida from north Africa, and the Movement for Tawhid and Jihad in West Africa – are hunting down Tuaregs, whose desert lands they have seized. Refugee Zicki Fli, 39, who arrived in Burkina Faso's Goudebo camp several days ago, said: "We were hunted. They came to track us down and if they found Tamasheq [the ancient language spoken by Tuaregs] they beat us badly."

Fli stayed in Mali until, 10 days ago in the town of Gossi, he witnessed something that changed his mind: "A man I knew would meet his fiancée every night, but somebody saw them and called the Islamists. They were beaten with batons 100 times. They kept on beating until both were dead."

Fli left Gossi the following morning, walking seven days to the refugee camp to which his heavily pregnant wife Fadii had fled weeks earlier to give birth. Fli says Fadii is depressed: they own nothing and don't know when, or if, they will return to Mali.

Toufenat Wallet Fikka, 37, spoke two weeks ago to a friend in Timbuktu who described a woman having a hand amputated and being whipped after being accused of stealing money equivalent to just over £1: "They had no evidence. Many people are very scared or running away. Two women, she said, were beaten to the floor because their heads were not totally covered."

One refugee returned to Mali wearing an Oxfam T-shirt and carrying condoms, the charity's main weapon in curbing population growth in a region with one of the world's highest infant mortality rates. When searched by the Islamic police, he was thrashed with a "wire whip" 80 times and told to return for further sentencing the next day.

He, too, fled to Burkina Faso. Those leaving say there is nothing left to enjoy. Mahmoud Ag Hatalio worked as a DJ. He says La Voie de N'Tillit, a popular local station, now broadcasts only prayers. Hatalio says he got lucky: a friend wrongly accused of stealing a bicycle lost a hand to the giant steel scissors specially made by a local blacksmith and later also a foot, to deliberately impair his mobility.

One aim appears to be the complete dismantling of Mali's once-famous secular, pluralist democracy, defined by world-renowned blues and folk music and fabled joie de vivre.

Ahmed Abdullai, from Haribomo, 30km from the Burkina Faso border, claimed that families, including Tuaregs, are being forced to hand over children to the militia. "There is a lot of these Islamic groups," said the 37-year-old former teacher. "Families are being forced to give up their children. They are told to kill, rape. Children do whatever they are told."

Kristalina Georgieva, the EU commissioner for humanitarian aid who recently visited the region to launch an increase in aid, said reports that respected elders were being killed by extremists were particularly troubling: "The effect is unravelling the very fabric of society. It's very hard to rebuild."

Mothers gather outside a health centre near Dori, north Burkina Faso. A quarter of children in the country suffer from malnutrition. Photograph: Mark Townsend for the Observer

The concern, for Georgieva, is that northern Mali's transformation into a massive jihadist enclave could replicate the recent history of Somalia. Others warn that Islamic militants are set on establishing a caliphate (a Muslim political-religious state) across the entire 3,000-mile wide Sahel. Intelligence suggests local militia are being assimilated into the extremist structure, and that Nigeria's notorious Islamist group Boko Haram has been seen in Mali.

Georgieva said: "The situation is now mushrooming, metastasising: there are around 100 little groups claiming to be involved. No one expected Boko Haram to explode in Nigeria, but once it did it was very hard to control. We could have a Somalia situation all over again if we do nothing."

The Malian army is fractured and under-resourced, and Europe, the US and local states are squabbling about intervention. The former Italian prime minister Romano Prodi, appointed UN envoy to the Sahel, still doesn't have an office in the region. "The speed with which we are moving towards mobilisation needs much more urgency," said Georgieva.

What exactly they are up against remains something of a mystery. The threat of abduction of foreigners is high, and the refugee camps in Burkina Faso have been moved away from the border to avoid raids. However, the rumours persist that al-Qaida is operating in Burkina Faso – and throughout the region. Charities are nervous. Seven French nationals are missing in northern Mali. In Bamako, the country's capital, the tension is palpable. Air France no longer allows its aircrew to stay overnight because of the risk of them being kidnapped.

Kids getting off truck at Burkina refugee camp. Photograph: Mark Townsend for the Observer

How well-equipped and numerous the Islamic extremists are is open to conjecture. Aboubacan Traoré, 27, who fled from Timbuktu last month, described the moment that heavily armed Islamic forces first stormed the city. "They were shooting everywhere. They had lots of guns, rocket-propelled grenades. There were many, many of them – hundreds."

No one doubts that the crisis is destabilising the entire region. Almost 350,000 Malians have fled from their homes, almost half to neighbouring countries, including 8,000 in Goudebo camp.

In simple terms, people are being forced from their homes on to land that can barely support its present incumbents. Oxfam is hurriedly sinking boreholes to serve communities that suddenly have to cope with tens of thousands of fresh arrivals.

But it is the inevitability of war that most agencies fear: any attempt to clear al-Qaida's latest assembly point will create a huge influx of refugees and animals on to a land that cannot sustain them.

In the meantime the situation is likely to worsen. Food prices in Mali and Burkina Faso remain stubbornly high despite a decent harvest, rendering the poorest unable to feed their families.

Experts say the region's rapid population growth is compounding the impact of the world's rapidly growing global middle class on prices. Climate change too cannot be ignored. The Sahel has endured three droughts in the past seven years.

Georgieva said the capacity for the poor to withstand such shocks has all but disappeared: the arrival of Islamic militants in the region is a factor too far. Despite a 13% increase in Burkina Faso's harvest, forecasters are already adamant that 2013 will bring no respite for the region's food crisis.

Mali refugees in Bamako Photograph: Mark Townsend for the Observer

Although a concerted and rapid response by aid agencies to conditions in the Sahel narrowly averted a humanitarian "catastrophe" this year – the European Commission estimates 400,000 children in the region have been saved from death by malnutrition – the same urgent response is required again.

Many fear complacency may set in, and that reports of yet another near humanitarian crisis in west Africa is unlikely to attract many headlines while foreign finances could be diverted to assist any military campaign. "It is why the Sahel has to be our top priority next year," said Georgieva.

Beyond the threat of a large-scale desert war, conflict on a micro scale is already evident in camps like Goudebo, which has a provisional capacity of 20,000 refugees. Camp visitors will wonder why only black Africans, 'Bella', can be seen queueing at the water collection points or building refugee tents.

The ancient Tuareg caste system, where the Bella were once slaves, still survives and means that the dark-skinned members of the tribe occupy the lowest positions in Tuareg society. By contrast, the Tuareg are often called "white" and claim that they are routinely victimised by the predominantly black, southern-ruled, post-independence Malian governments who themselves are uncomfortable with the Tuaregs' reputation for enslaving black Africans.

The UN says it is "deeply aware" of the tension in its camps but rejects claims the Bella are slaves. "They are more like servants – it is a master and servant relationship," said one.

But skin colour dominates many conversations with the Malian refugees. Mohamed Ag Almougamar alleges that members of the Malian army killed a large number of Tuaregs at Nampalari, a network of 22 desert villages in the north of the country holding 11,000 people.

The incident, again impossible to verify, was said to have occurred over the summer and, according to Almougamar, was racist in motive. "We have clear skin, we are killed like sheep," he said.

As the west deliberates its next move with France favouring immediate military intervention and the US opting for a diplomatic resolution, it seems certain that the hundreds of thousands of Malian refugees, including the traditionally nomadic Tuaregs, are destined to remain in camps for months yet.

Mossa Ag Wantaganatt, 46, who arrived in Burkina Faso at the start of the month, said: "Our lives are on hold. We are living in a cage."