* Islamist rebels said to take refuge among civilians
* Algerian attack is apparent revenge for Mali campaign
* Britain and Germany providing support
The first West African regional forces arrived in Mali on Thursday to reinforce French and Malian troops struggling to push back al Qaeda-linked rebels after seven days of French air strikes.
A contingent of around 100 Togolese troops landed in Bamako and was due to be joined by Nigerian forces already en route. Nigerien and Chadian forces are massing in Niger, Mali's neighbour to the east.
The scrambling of the U.N.-mandated African mission, which previously had not been due for deployment until September, will be a boon for France, the former colonial power in Mali.
French troops, which had moved northwards from Bamako in an armoured column on Tuesday, pinned down some Islamist fighters in the small town of Diabaly. But French forces held back from launching an all-out assault as the insurgents had taken refuge in the homes of civilians, residents said.
"The Islamists are still in Diabaly. They are very many of them. Every time they hear a plane overhead, they run into homes, traumatising the people," said one woman who fled the town with her three children overnight.
"Life is difficult for the people of northern Mali and the international community has the duty to help these people," said Togolese Lieutenant Colonel Mawoute Bayassim Gnamkoulamba.
"That is why we think that it is necessary for us to protect Mali and we are proud today to fulfil that mission."
French forces, numbering some 1,400 soldiers, began ground operations on Wednesday against an Islamist coalition grouping al Qaeda's North African wing AQIM and the home-grown Ansar Dine and MUJWA militants.
President Francois Hollande ordered the intervention on the grounds that the Islamists who had taken over the poor West African country's north could turn it into a "terrorist state" which would radiate a threat beyond its borders.
Hollande has pledged they will stay until stability returns to Mali but, in the first apparent retaliatory attack, al Qaeda-linked militants took dozens of foreigners hostage at a gas plant in Algeria, blaming Algiers' cooperation with France.
A total of 2,500 French troops are expected in Mali but Paris is keen to swiftly hand the mission over to West Africa's ECOWAS bloc, which in December secured a United Nations mandate for a 3,300-strong mission to help Mali recapture its north.
A rebel push into central Mali was last week halted by bombings by French aircraft and the deployment of ground troops.
A convoy of armoured vehicles, fuel tankers and ambulances and around 200 soldiers from Mali's eastern neighbour Niger was positioned at that eastern border, witnesses said.
A Reuters witness at the scene said heavy weapons fire rang out as troops tested artillery.
Communications with residents in Islamist-controlled towns have become more difficult as some mobile phone towers have stopped working. Residents said rebel fighters are suspicious of anyone using phones, fearing they are passing information to the enemy.
"There are no longer any police stations. (The Islamists) have dispersed across the city, mixing in with the population," said Ibrahim Mamane, a resident from the town of Gao who reached the border with Niger.
"The population is ready and is waiting for the French forces with open arms. If they attack Gao, the people will fight the Islamists with their bare hands," he added.
Mali's recent troubles began with a coup in Bamako last March that ended a period of stable rule that saw a series of elections. In the confusion that followed, Islamist forces seized large swathes of the north and imposed a strict rule reminiscent of Afghanistan under the Taliban.
Military experts say France and its African allies must now capitalise on a week of hard-hitting air strikes by seizing the initiative on the ground to prevent the insurgents from withdrawing into the desert and reorganising.
"The whole world clearly needs to unite and do much more than is presently being done to contain terrorism," Nigerian President Goodluck Jonathan said.
Diabaly is a rural town with a population of about 35,000, about 360 km (220 miles) from Bamako and near the border with Mauritania, where AQIM has bases.
A spokesman for MUJWA confirmed that their positions in Diabaly had been fired on but said French forces had not penetrated the town itself.
Diabaly's mayor Salif Ouedrago, who fled on Wednesday, told Malian state radio: "There were deaths on the side of the jihadists. They buried their dead yesterday."
Meanwhile, the Malian army rushed reinforcements to a town closer to the capital Bamako on Thursday after Islamist fighters were spotted near the border with Mauritania.
"Banamba is in a state of alert. Reinforcements have been sent. Nigerian troops expected to arrive in Bamako today could be deployed there to secure the zone," a senior Malian military source told Reuters.
An inhabitant of Banamba, 140 km (90 miles) from the capital, reported the arrival of soldiers after insurgents were seen in the Boron border area.
With African states facing huge logistical and transport challenges, Germany promised two Transall military transport planes to help fly in their soldiers.
Britain has supplied two C-17 military transport planes to ferry in French armoured vehicles and medical supplies. The United States is considering logistical and surveillance support but has ruled out sending in U.S. troops.