* Gao residents dance in the streets, throw off sharia law
* French, Malian troops at Timbuktu, working to secure it
* Third town, Kidal, still remains in rebel hands
* AU chairman chides African leaders for slow Mali action (Updates with Gao residents celebrating, adds details, quotes)
Residents of Mali's northern town of Gao, captured from sharia-observing Islamist rebels by French and Malian troops, danced in the streets to drums and music on Sunday as the French-led offensive also drove the rebels from Timbuktu.
The weekend gains made at Gao and Timbuktu by the French and Malian troops capped a two-week whirlwind intervention by France in its former Sahel colony, which has driven al Qaeda-allied militant fighters northwards into the desert and mountains.
In Gao, the largest town in the north where the Islamist insurgents had banned music and smoking, cut off the hands of thieves and ordered women to wear veils, thousands cheered the liberating troops with shouts of "Mali, Mali, France, France".
French special forces backed by Rafale fighter jets and Tiger helicopters had helped capture the town early on Saturday.
Among the celebrating Gao crowds, many smoked cigarettes, women went unveiled and some men wore shorts to flout the severe sharia Islamic law the rebels had imposed for months. Youths on motorcycles flew the flags of Mali, France and Niger, whose troops also helped secure the ancient town on the Niger River.
"Now we can breath freely," said Hawa Toure, 25, wearing a colourful traditional African robe banned under sharia for being too revealing. "We are as free as the wind today. We thank all of our friends around the world who helped us," she said.
French and Malian troops also arrived at the weekend at the fabled Saharan trading town of Timbuktu, more than 300 km (190 miles) to the west of Gao, and were working to restore government control over the UNESCO World Heritage Site.
A Malian military source said the French and Malian troops had met no resistance up to the gates of Timbuktu and controlled the airport. They were working on flushing out any Islamist rebel fighters still hiding in the city, a labyrinth of ancient mosques and monuments and mud-brick homes between alleys.
"Timbuktu is delicate, you can't just go in like that," the source, who asked not to be named, said.
A third northern town, the Tuareg seat of Kidal, in Mali's rugged and remote northeast, remains in rebel hands.
The United States and Europe are backing the U.N.-mandated Mali operation as a counterstrike against the threat of radical Islamist jihadists using the West African state's inhospitable Sahara desert as a launch pad for international attacks.
FEARS OF GUERRILLA WAR
Fighters from the Islamist alliance in north Mali, which groups AQIM with Malian Islamist group Ansar Dine and AQIM splinter MUJWA, had destroyed ancient shrines sacred to moderate Sufi Moslems in Timbuktu, provoking international outrage.
They had also applied amputations for thieves and stoning of adulterers under sharia law.
As the French and Malian troops push into northern Mali, African troops from a continental intervention force expected to number 7,700 are being flown into the country, despite delays due to logistical problems and the lack of airlift capacity.
France sent warplanes and 2,500 troops to Mali after its government appealed to Paris for help when Islamist rebels launched an offensive south towards the capital Bamako early in January. They seized several towns, since retaken by the French.
In the face of the two-week-old French-Malian counter offensive, the rebels seemed to be pulling back north into the trackless desert wastes and mountain fastnesses of the Sahara.
Military experts fear they could carry on a gruelling hit-and-run guerrilla war against the government from there.
A leader of Mali's main Tuareg insurgent movement, MNLA, whose initial separatist rebellion in the north was hijacked by al Qaeda and its local Malian allies, offered help from his group's desert fighters to the French-led offensive.
Speaking at Ouagadougou in Burkina Faso, Ibrahim Ag Mohamed Assaleh said the MNLA was preparing to attack the withdrawing al Qaeda-allied Islamist forces and its leaders, whom he said were hiding in the Tidmane and Tigharghar mountains in Kidal region.
At Konna, 500 km (312 miles) southeast of Gao and recently recaptured from the rebels, some people were still afraid.
"No-one believes the rebels will give up without resisting. They may be regrouping for an attack, there is fear of a guerrilla war," said Salou Toure, a middle-aged resident of Timbuktu who had fled that town three months ago.
"WE CUT HIS THROAT"
In Gao, the atmosphere was jubilant. Malian army Colonel Didier Dacko declared the town "liberated"."I thank France and all friendly nations for helping Mali," he told the crowds.
Gao Mayor Sadou Diallo, who had taken refuge in Bamako during the Islamist occupation, was triumphantly reinstalled.
Around a dozen "terrorists" were killed in the taking of Gao, while French forces suffered no losses or injuries, France's defence ministry said.
Youths in the city said there were still some rebels and rebel sympathisers around, but they were being found. "Yesterday, even, we found one hiding in a house. We cut his throat," one man said, asking not to be named. "Today we found another and we brought him to the army."
Human rights groups have expressed fears of violent reprisals being taken against lighter-skinned Malians suspected of sympathising with the Islamist rebels, who have many Tuaregs and Arabs in their ranks.
At an African Union summit in Addis Ababa, outgoing AU chairman Thomas Boni Yayi, president of Benin, criticised Africa's slow response to the Islamist insurgency in Mali.
"How could it be that when faced with a danger that threatens its very foundations, Africa, although it had the means to defend itself, continued to wait," Yayi said.
OFFERS OF FUNDS, HELP
Around 1,900 African troops, including Chadian, have been deployed to Mali so far as part of the planned U.N.-backed African intervention force, known as AFISMA. Burkina Faso, Benin, Nigeria, Senegal, Togo, Niger and Chad are providing troops. Burundi and other nations have pledged to contribute.
The United States and Europe, while providing airlift and intelligence support to the anti-militant offensive in Mali, are not planning to send in any combat troops. Washington agreed to fly tankers to refuel French warplanes.
The AU is expected to seek hundreds of millions of dollars in logistical support and funding for the African Mali force at a conference of donors to be held in Addis Ababa on Jan. 29.
European Commissioner for Development Andris Piebalgs told Reuters in Addis Ababa he believed enough funds would be offered to sustain the African troop intervention for a year.
Piebalgs added the latest estimated cost of the operation he had seen was 430 million euros.