(Updates with comments from Libya militia chief)
* Kidnappers intercepted near Algeria-Libyan border
* Security sources say al Qaeda behind abduction
* Incident will heighten fears about Libya instability
* Tripoli militia chief says incident an Algerian issue
By Christian Lowe and Lamine Chikhi
ALGIERS, Jan 17 (Reuters) - A kidnapped Algerian regional governor has been freed after his captors were intercepted inside Libya, officials said on Tuesday, an incident that will raise new concerns about instability spilling over from Libya to its neighbours.
Two Algerian security sources earlier told Reuters the governor was being held by al Qaeda. Security experts have warned the group is exploiting turmoil in Libya after the fall of Muammar Gaddafi to carve out a safe haven.
Algeria's state news agency, citing a source close to the Interior Ministry, said the governor, Mohamed Laid Khelfi, was freed by the Libyan authorities when they stopped his kidnappers about 150 km inside Libyan territory.
The agency said the governor would soon be handed over to the Algerian authorities at a nearby border crossing.
An Algerian security official, speaking on condition of anonymity, told Reuters: "The governor is safe and well. He was freed. That is all I can say for now."
DESERT ATTACK
The kidnapping, deep in the Sahara desert, was the most audacious attack on a senior official for years in Algeria, which has been fighting a two-decade battle against Islamist insurgents.
Khelfi, governor of the Illizi region about 1,700 km (1,000 miles) southeast of the Algerian capital, was driving away from a meeting on the Libyan border on Monday afternoon when three armed men stopped his convoy, the Interior Ministry said.
The attackers released his driver and an aide, but took the governor in the direction of the border, a ministry statement said. The ministry did not identify the kidnappers, saying only they were young Algerian men who were known to the authorities.
Two Algerian security officials, who spoke to Reuters on condition of anonymity, said the governor had been held by al Qaeda's north African branch, al Qaeda in the Islamic Maghreb (AQIM). One of the officials said the group had contacted Khelfi's family by telephone after he was captured.
A leader of one of Tripoli's most powerful militia groups rejected any suggestion that Libya was failing to secure its own territory.
"This is a security failure on the part of Algeria and we in Libya have nothing to do with it," Abdullah Naker, commander of the Tripoli Revolutionary Council which is loosely affiliated to Libya's interim government, told Reuters. "They shouldn't blame us for their security failure, our border is secured and the problem happened on the Algerian side of the border."
AQIM carries out kidnappings, ambushes and suicide bombings, mainly in Algeria but also in neighbouring states which straddle the Sahara desert.
With backing from Western states, which are concerned the group could spread its activities further afield, Algerian security forces have been able to reduce the insurgency to a small rump of fighters hiding out in remote areas.
But instability in Libya could give AQIM a new lease of life by providing the insurgents with a source of weapons and a safe haven in vast desert tracts which the new Libyan authorities lack the capacity to police.
"This (kidnapping) is a very dangerous escalation which shows that the group is feeling secure and strong because of the chaos in Libya," said Samer Riad, a security expert who runs Algeria's numidianews.com news portal.
Western diplomats say Algeria is under serious threat from al Qaeda and is an important ally in helping fight the spread of the insurgency. Some security experts say the al Qaeda threat also helps Algeria garner international support.
The kidnapping was unusual because in Algeria, governors and all other senior government officials almost always travel with heavy security details, making them a "hard" target, which the insurgents tend to avoid.
One of the security officials who spoke to Reuters said the governor had on Monday been at Debdeb, a border crossing with Libya, trying to calm down local protesters angry at unemployment and poor living conditions.
Among the protesters were relatives of Abdelhamid Abu Zeid, one of AQIM's leading field commanders in the Sahara desert, the official said. Abu Zeid is believed by many security experts to have ordered the killings of two foreigners kidnapped by his group, Frenchman Michel Germaneau and Briton Edwin Dyer.
The security official said that the Illizi governor was kidnapped by local people who had been involved in the protest, and was subsequently handed over to insurgents under the command of Abu Zeid. (Additional reporting by Mahmoud Habboush and Ali Shuaib in Tripoli; Editing by)
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