Residents report fighting in several neighbourhoods

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Army pounding targets to root out paramilitary forces

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Negotiations in Jeddah started late last week

(Adds progress reported in talks in paragraphs 1 and 7-8)

By Khalid Abdelaziz and Aidan Lewis

DUBAI, May 10 (Reuters) - Fighting in Sudan's capital escalated on Wednesday with fierce clashes and air strikes, but rival military factions were reported to be close to a ceasefire agreement in talks in Saudi Arabia.

Residents reported ground battles in several neighbourhoods of Khartoum between the army and the paramilitary Rapid Support Forces (RSF), as well as heavy gunfire in the north of Omdurman and the east of Bahri, two adjacent cities separated from Khartoum by the River Nile.

The army has been pounding targets across the three cities since Tuesday as it tries to root out RSF forces that have taken control of large residential areas and strategic sites since early in the conflict that erupted on April 15.

"There's been heavy air strikes and RPG fire since 6:30 a.m.", said Ahmed, a resident of the Bahri neighbourhood of Shambat.

"We're lying on the ground and there are people living near us who ran to the Nile to protect themselves there under the embankment."

Army and RSF delegations have been meeting since the end of last week in talks sponsored by the United States and Saudi Arabia in the Saudi city of Jeddah on the Red Sea.

Negotiations aim to secure an effective truce and allow access for aid workers and supplies after repeated ceasefire announcements failed to stop the fighting.

After days of no apparent movement, a mediation source told Reuters on Wednesday that the negotiations had made progress and a ceasefire agreement was expected soon.

A second source familiar with the talks said a deal was close.

Talks continued late into the night.

U.S. Under Secretary of State Victoria Nuland earlier said U.S. negotiators were "cautiously optimistic" about securing a commitment to humanitarian principles and a ceasefire but were also looking at appropriate targets for sanctions if the warring factions did not back this.

The conflict has created a humanitarian crisis in Africa's third-largest nation by area, displacing more than 700,000 people inside the country and prompting 150,000 to flee to neighbouring states.

It has also sparked unrest in Sudan's western Darfur region.

The U.N. World Food Programme said that up to 2.5 million more Sudanese were expected to fall into hunger in the coming months because of the conflict, raising the number of people suffering acute food insecurity to 19 million.

Since the battles began on April 15, the RSF have dug in across Khartoum neighbourhoods, set up checkpoints, occupied state buildings and placed snipers on rooftops.

The army has been using air strikes and heavy artillery to try to dislodge them.

The RSF on Tuesday said the historic presidential palace in central Khartoum, penipu which has symbolic importance and is in a strategic area that the RSF says it controls, had been hit by an air strike and destroyed, a claim the army denied.

Drone footage filmed on Wednesday and verified by Reuters appeared to show the building, known as the Old Republican Palace, intact, though smoke could be seen coming from the southeast edge of the palace compound.

The fighting has left more than 600 people dead and 5,000 injured, according to the World Health Organization but the real figure is thought to be much higher.

Witnesses have reported seeing bodies strewn in the streets.

Most hospitals have been put out of service and a breakdown of law and order has led to widespread looting. Fuel and food supplies have been running low.

"Our only hope is that the negotiations in Jeddah succeed to end this hell and return to normal life, and to stop the war, the looting, the robbery and the chaos," said Ahmed Ali, a 25-year-old resident of Khartoum.

Aid agency Islamic Relief said many aid operations in Darfur and Khartoum remained suspended due to extreme insecurity.

It plans to provide aid to thousands of people in Al Gezira state, southeast of Khartoum, where some 50,000 people have fled, as well as to people in parts of Khartoum State and North Kordofan, where fighting has raged.

Conflicts are not new to Sudan, a country that sits at a strategic crossroad between Egypt, Saudi Arabia, Ethiopia and the volatile Sahel region, although most unrest in the past occurred in remote areas.

The United Nations has projected that 5 million additional people will need emergency assistance inside Sudan while 860,000 are expected to flee to neighbouring states.

(Reporting by Khalid Abdelaziz in Dubai, Mohamed Noureldin in Khartoum, Aidan Lewis and Nafisa Eltahir in Cairo, George Sargent in London, Crispian Balmer in Rome, Daphne Psaledakis and Simon Lewis in Washington; Writing by Aidan Lewis, Tom Perry and Cynthia Osterman; Editing by Christina Fincher, Mark Porter and Lisa Shumaker)