* Neighbours fear full-blown civil war in South Sudan
* Conflict divides South Sudan on ethnic lines
* Govt troops take capital of oil producing state (Adds rebel defeat in Malakal, comments by Information Minister)
By Richard Lough and Carl Odera
NAIROBI/JUBA, Dec 27 (Reuters) - South Sudan's neighbours threw their weight behind President Salva Kiir on Friday in an ethnic-based conflict ravaging the world's newest state, saying they would not accept any bid to overthrow his democratically elected government.
Kiir also received a boost in Malakal, capital of South Sudan's major oil producing state of Upper Nile, where government forces defeated rebels loyal to Kiir's former deputy Riek Machar after four days of intense fighting.
A cabinet minister told Reuters Kiir's government was ready for an immediate ceasefire but it was not immediately clear whether Machar would accept such a proposal without the release of political allies held in detention.
Addressing regional leaders at a special summit on South Sudan held by the east African body Inter Governmental Authority on Development (IGAD), Kenyan President Uhuru Kenyatta urged Kiir and Machar to seize "the small window of opportunity" and start peace talks.
"Let it be known that we in IGAD will not accept the unconstitutional overthrow of a duly and democratically elected government in South Sudan. Violence has never provided optimum solutions," Kenyatta said in a statement.
The violence erupted in South Sudan on Dec. 15 and quickly spread, dividing the landlocked country of 10.8 million along ethnic lines between the Nuer - Machar's people - and the Dinka, to whom Kiir belongs.
Western powers and regional governments fear the ethnic bloodletting could lead to a civil war, posing a danger to a fragile region with notoriously porous borders.
There was encouraging news for Kiir from the battlefield.
"(Government forces) are 100 percent in control of Malakal town and are pursuing the forces of the coup," army spokesman Philip Aguer said by phone in South Sudan's capital Juba.
South Sudan's entire oil output currently comes from Upper Nile as other oil fields have been shut down by the fighting.
Machar, who served as vice president of South Sudan until Kiir sacked him in July, has previously said he is open to peace talks on condition that his detained political allies are freed - a demand Kiir has so far shown no intention of meeting.
Calling for a ceasefire on Friday, Cabinet Affairs Minister Martin Elia Lomuro told Reuters from Juba: "The cessation of hostilities is to temporarily stop the mayhem, to not attack so we move on confidently (to peace talks)."
Information Minister Michael Makuei said a ceasefire would not hold if it were exploited by the rebels to continue killing civilians.
Kenyatta said South Sudan and regional governments had "no time" to find a solution to what he called a political problem within the ruling Sudan People's Liberation Movement (SPLM) party which had degenerated into a violent confrontation that risked taking "a dire ethnic direction".
Kenyatta said a military solution had little chance of succeeding in South Sudan.
"The present crisis, if not contained, will produce millions of internally displaced persons and refugees and set back this region immeasurably," Kenyatta told the regional leaders.
The head of the U.N. mission in Sudan has said well over 1,000 people have already been killed. (Writing by Drazen Jorgic; Editing by Gareth Jones)