Algerian troops have surrounded a gas facility in the east of the country where foreign workers are being held hostage by Islamist militants.
The kidnappers occupied the complex at In Amenas on Wednesday, after killing a Briton and an Algerian in an attack on a bus.
Algeria says some 20 foreign nationals are being held hostage, although the kidnappers say they have 41.
The captives include British, Japanese, US, French and Norwegian nationals.
One statement purported to be from the hostage-takers demanded an end to the French military intervention against Islamist rebels in Mali.
Algerian Interior Minister Daho Ould Kabila said the militants wanted to leave the country with the hostages, but he had refused to let them go.
“We reject all negotiations with the group,” he told reporters late on Wednesday.
Daho Ould Kabila added that the kidnappers were Algerian and operating under orders from Mokhtar Belmokhtar, a senior commander of al-Qaeda in the Islamic Maghreb (AQIM) before late last year, when he set up his own armed group after apparently falling out with other leaders.
Minister Daho Ould Kabila said a heavily armed “terrorist group” had attacked a bus carrying workers from In Amenas at about 05:00 on Wednesday.
The gas field is operated by the Algerian state oil company, Sonatrach, along with the British oil company BP and Norway’s Statoil.
It is located about 1,300 km (800 miles) south-east of Algiers, and about 60 km (37 miles) west of the Libyan border.
The attackers were repelled by police who had been escorting the bus, but a Briton and an Algerian national had been killed, Daho Ould Kabila said.
Two other British nationals, a Norwegian, two police officers and a security guard were also hurt in the fire fight, he added.
Afterwards, the militants drove to the gas facility’s living quarters and took a number of Algerian and foreign workers hostage.
Dozens of Algerian workers were later released.
Senior al-Qaeda commander Mokhtar Belmokhtar has been identified as the leader behind Algeria kidnapping
The foreign nationals were being held in one wing of the living quarters, which the security services and army had surrounded, Daho Ould Kabila said.
“Since then, they’ve been facing off. The security forces are consolidating their position around the base,” he added.
Early on Thursday, British Foreign Secretary William Hague confirmed that a Briton had died and that “a number” of others were being held hostage.
He described the killings as the “cold-blooded murder of people going about their business”.
A worker told France’s Le Figaro newspaper the captors had mined the facility and demanded food, water and vehicles.
Daho Ould Kabila said nearby border crossings had been closed as a precaution and that the foreign ministry was in contact with diplomats from the hostages’ countries.
UK Foreign Secretary William Hague confirmed the captives included “a number of British nationals”, adding: “This is therefore a very dangerous situation.”
He said the UK government was working “around the clock” to resolve the crisis.
US Secretary of Defence Leon Panetta said he could not confirm the exact number of Americans seized in the attack.
“By all indications this is a terrorist act and the United States strongly condemns these kinds of terrorist acts,” he said.
Meanwhile Norwegian Prime Minister Jens Stoltenberg said 13 Norwegian employees of Statoil were believed held hostage at the gas facility. Irish Foreign Minister Eamon Gilmore said one of its nationals was a hostage.
Japanese news agencies, citing unnamed government officials, said there were three Japanese hostages.
Two groups led by Belmokhtar – the Khaled Abu al-Abbas Brigade and the Signed-in-Blood Battalion – said they were behind the incident.
Earlier, a man claiming to be a spokesman for the militants said al-Qaeda had carried out the attack.
A list of demands had been sent to Algerian authorities, and the hostages would be killed if troops attempted to rescue them, the spokesman added.
”Storming the gas complex would be easy for the Algerian military, but the outcome of such an operation would be disastrous,” he warned.
In a statement carried on Mauritanian media, the Signed-in-Blood Battalion said it would hold the Algerian and French governments and the nations of the hostages responsible if its demands were not met, saying they must bring an end to the French intervention in Mali.
Militant groups have vowed to avenge the intervention, where French forces have been battling Islamists linked to AQIM for the past week.
Algeria has been allowing French aircraft to use its air space.
Fought Soviet forces in Afghanistan in late 1980s
Former leading figure in al-Qaeda in the Land of the Islamic Maghreb. Left in late 2012 after falling out with leaders
Now heads the Khaled Abu al-Abbas Brigade and the Signed-in-Blood Battalion
Known as “The One-Eyed” as he wears an eyepatch over a lost eye
French intelligence has dubbed him “The Uncatchable”, while locals refer to him as “Mister Marlboro” for his illicit cigarettes operation
France is ready to stop Islamist militants who control northern Mali if they continue their offensive, President Francois Hollande has said.
However, President Francois Hollande said France would only act under UN authorization.
Francois Hollande was responding to a plea by Malian President Dioncounda Traore for help to counter a renewed rebel offensive.
Earlier, an emergency meeting of the UN Security Council called for the rapid deployment of an African-led international force to Mali.
Armed groups, some linked to al-Qaeda, took control of northern Mali in April 2012.
They have enforced an extreme interpretation of Islamic law.
Analysts say Western nations are concerned that Mali’s north could become a base for terrorists to plan and launch international attacks.
The UN has approved plans to send some 3,000 African troops to Mali to recapture the north but they are not due to arrive until September.
“They (rebels) are trying to deliver a fatal blow to the very existence of this country,” Francois Hollande said.
“France, like its African partners, cannot accept this. I have decided that France will respond, alongside our African partners, to the request from the Malian authorities.
“We will do it strictly within the framework of the United Nations Security Council resolution. We will be ready to stop the terrorists’ offensive if it continues.”
France is ready to stop Islamist militants who control northern Mali if they continue their offensive, President Francois Hollande has said
Diplomatic sources said Francois Hollande and Dioncounda Traore would meet for talks in Paris next Wednesday.
It is not clear what form French intervention might take, but one possibility is the use of air strikes if the rebels advance on the strategic central town of Mopti.
Speaking shortly before Francois Hollande’s address, French War Veterans Minister Kader Arif appeared to rule out a speedy deployment of French troops to Mali.
“There is clearly an emergency but… there’s no point in rushing in,” said Kader Arif.
“At the same time, there can be no kind of engagement that could take place in this emergency without taking account of the international scale.”
Earlier this week, the militant Islamist group Ansar Dine said it had entered the key central town of Konna and intended to advance further south.
The army has refused to comment on the claim.
Following its emergency meeting on Mali on Thursday, the UN Security Council called for a “rapid deployment” of the African force and expressed “grave concern” at the capture of Konna by “terrorists and extremist groups”.
UN diplomats in New York said President Dioncounda Traore had appealed for help to Paris and to UN chief Ban Ki-moon.
“It basically said <<Help, France>>,” the US ambassador to the UN Susan Rice told reporters in describing the letter.
Egyptian army helicopters have fired missiles on suspected Islamist militants in Sinai peninsula, security officials say.
Twenty people were reported killed in Touma village, while the Sheikh Zuwaid area to the west was also hit.
The strikes came after security checkpoints were allegedly attacked by gunmen in the town of al-Arish, leaving a number of people injured.
On Sunday, militants killed 16 Egyptian border guards in the area.
After that attack – the deadliest and most brazen against Egyptian troops in this border region for decades – Israeli forces said they killed some of the militants who broke through into Israel.
There has been a heavy military build-up around al-Arish, correspondents report, and Egypt’s Rafah border crossing to Gaza has been indefinitely closed as security forces hunt the remaining attackers.
Egypt is also reported to have begun sealing off the illicit smuggling tunnels into Gaza.
This is the first time Egypt has fired missiles in Sinai since the 1973 war with Israel, when it attempted to recapture the Sinai peninsula, security officials told Associated Press.
Egyptian army helicopters have fired missiles on suspected Islamist militants in Sinai peninsula
Egyptian military presence in Sinai is limited and requires Israeli approval under the terms of the 1979 peace treaty between the nations which returned Sinai to Egyptian control.
Tensions are very high in the area, where Islamic extremists are said to have gained a foothold in recent months, taking advantage of the security vacuum left after former President Hosni Mubarak was ousted last year.
A Sinai army commander told Reuters news agency the army had received information that there were many militants in Touma.
“We have succeeded in entering Touma, killed 20 terrorists and destroyed three armored cars belonging to terrorists. Operations are still ongoing,” he told Reuters. State television also reported the deaths.
The attacks came hours after three security checkpoints were attacked in the main regional town of al-Arish.
Locals said rounds of gunfire could be heard just before midnight and telephone lines and the Internet were cut off.
At least four people – including police officers and a civilian – were wounded in those attacks.
The Egyptian soldiers killed in Sunday’s attack were buried on Tuesday in a funeral marked by angry calls for vengeance.
Some protesters chanted slogans against the Muslim Brotherhood, and according to witnesses, tried to assault Prime Minister Hisham Qandil.
Both Israeli and Egyptian officials blamed Sunday’s attack on Islamist militants – though Egypt’s Muslim Brotherhood, the group to which President Mohammed Mursi belongs, accused the Israeli spy agency Mossad of being responsible.
Israel rejected that claim as “nonsense”.
On Tuesday, Israel handed Egypt six “completely charred” bodies it says are some of the militants behind Sunday’s attack on the Egyptian soldiers, a medical official in al-Arish told AFP news agency. The bodies have not yet been identified.
Israel signalled its approval of Egypt’s strikes, with senior defence official Amos Gilad telling Israel Radio on Wednesday that Egypt was determined to “impose order in Sinai because that is their responsibility… If they don’t remove and uproot [the threat], it will continue to strike”.
The rising violence in the area is a test of credibility for the government of President Mohammed Mursi, correspondents say.
Although it is clear that Israel has approved the build-up of troops around al-Arish, Israel has historically been reluctant to see a large increase in Egyptian troops close to its border.