* Karzai urges countrymen to "come to your senses"
* Bloodiest year of war since 2001, but insurgency growing
* Contacts with Taliban, but no path yet to reconciliation (Adds background on Taliban contacts)
By Sayed Salahuddin
KABUL, Sept 28 (Reuters) - Afghan President Hamid Karzai wept on Tuesday as he called on Afghans to "come to their senses" and move faster towards peace, or risk seeing the next generation flee abroad and lose their Afghan identity.
Afghans must live and work in their country and serve it, he said, as he identified for the first time some of the members of a peace council that will help seek a political rather than military end to fighting with Taliban-led insurgents.
"I do not want Mirwais, my son, to be a foreigner, I do not want this. I want Mirwais to be Afghan," said Karzai, who himself spent many years in exile in Pakistan, while fighting the Soviet occupation in the 1980s and later during Taliban rule.
"Therefore come to your senses ... you are witnessing what is happening on our soil and only through our efforts can our homeland be ours," he added, drawing huge applause from an audience at a international literacy day event in a Kabul school.
This year has been the bloodiest since 2001, when U.S.-led forces overthrew the Taliban in the weeks after the Sept. 11 attacks on the United States.
With the insurgency gaining strength despite the presence of nearly 150,000 foreign forces, there is a growing sense both at home and in some quarters among Afghanistan&${esc.hash}39;s allies that talks may be the only route to peace.
In June, Karzai summoned a peace jirga, or traditional gathering of tribal and community leaders, which accepted his proposal to form a council to seek peace.
But the Taliban have scoffed at the idea of talks, saying all foreign forces must first leave Afghanistan.
General David Petraeus, the top U.S. and NATO commander in Afghanistan, has acknowledged contacts between Kabul and very senior members of the Taliban. But he has also added it was premature to say whether those Taliban were willing to accept Karzai&${esc.hash}39;s terms for pursuing reconciliation.
Karzai&${esc.hash}39;s council will have more than 68 members including two former presidents, at least two former Taliban officials, as well as clerics and women. The council will try to help mediate peace talks with Taliban-led insurgents.
DOLLARS AND EXILE
Its members were agreed after deliberations with tribal chiefs and power brokers, some of who sided with the United States in toppling the Taliban in 2001.
"The government of Afghanistan with further seriousness ... should take vigorous steps for bringing peace to this soil as soon as possible," Karzai said.
Karzai asked women in the audience whether they supported the talks, as some women&${esc.hash}39;s activists have expressed concern that making a deal with the hardline Taliban could erode hard-won rights to education, work and freedom of movement.
Dozens raised their hands as a sign of agreement.
Karzai&${esc.hash}39;s peace plan, backed by tribal elders at the June "peace jirga," involves luring foot soldiers away from the battlefield with cash and job incentives while seeking reconciliation with senior militant leaders by offering them asylum in Muslim countries and striking their names off a U.N. blacklist.
Donor nations, most of them in Western countries, have pledged to provided tens of millions of dollars for bringing over the foot Taliban soldiers.
Karzai has set an ambitious target of 2014 for Afghanistan to take over security responsibility from U.S. and NATO forces.
U.S. President Barack Obama, who will conduct a war strategy review in December, also plans to begin a gradual withdrawal of U.S. troops from July 2011 if conditions allow.
Washington&${esc.hash}39;s NATO allies are increasingly uneasy about the unpopular war and are eager to shift security responsibilities to Afghan forces. (Editing by Emma Graham-Harrison) (For more Reuters coverage of Afghanistan and Pakistan, see: http://www.reuters.com/news/globalcoverage/afghanistanpakistan) (sayed.salahuddin@thomsonreuters.com; Kabul newsroom: +93 799 335 285)) (If you have a query or comment about this story, send an e-mail to news.feedback.asia@thomsonreuters.com)
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