* Rebels launched assault on Tuesday morning
* First attack on major town since ceasefire deal
* Upper Nile is country's main oil producing state
By Carl Odera
JUBA, Feb 18 (Reuters) - South Sudanese rebels said they had taken control of the capital of oil-producing Upper Nile state on Tuesday, in the first fighting in a major town since rebels and the government signed a ceasefire in January.
The Juba government confirmed an assault was launched but denied rebels controlled the town, which lies 650 km (400 miles) north of the national capital Juba. It is also located on the fringes of one country's main oil-producing areas.
The clashes will fuel concerns over the security of South Sudan's northern oil fields - an economic lifeline for the world's newest state - and raise pressure on both camps to revive stalled peace talks in neighbouring Ethiopia.
Gathoth Gatkuoth, commander for rebel forces in Upper Nile who is a close ally of former vice president Riek Machar, told Reuters by telephone his forces struck Malakal on Tuesday morning and swiftly retook the dusty market town.
"The rebels have violated the ceasefire and attacked Malakal this morning," Philip Aguer, spokesman for the government army, told Reuters, denying the town had fallen.
Aguer said that fighting continued in Malakal's southern area although he said communication had been lost.
Aguer's comments came after a spokesman for Upper Nile's regional administration told Reuters clashes began at around 7 a.m. (0400 GMT) and that the army was engaged in battles in Malakal's northern, southern and central zones.
A Reuters photographer, who had been travelling with rebels in February, said the forces had been moving towards Malakal.
The rebel move on the town may be aimed at strengthening its hand before a second round of peace talks.
Situated on the banks of the White Nile, Malakal first fell to rebels after fighting broke out in mid-December before government forces recaptured it last month.
President Salva Kiir's government and rebels who support Machar have both accused the other of violating the Jan. 23 ceasefire deal brokered by neighbouring east African states.
Thousands of people have been killed and more than 800,000 have fled their homes since fighting was triggered by a power struggle between President Kiir and Machar, his former deputy whom he sacked in July.
U.N. spokesman in South Sudan, Joe Contreras, said a U.N. camp in Malakal, where many of the displaced people had fled for protection, had been caught in the crossfire.
South Sudan says it has been forced to cut oil production by a fifth to 200,000 barrels per day, all of which is pumped from Upper Nile. Oil accounts for 98 percent of government revenues.
Malakal lies about 140 km (90 miles) from Paloch, an oil complex where a key crude oil processing facility is situated.
"All the oil from the fields around Upper Nile is pumped to Paloch," said Jacob Jok Dut, director of the Centre for Democracy and International Analysis who follows the oil industry closely. "If Malakal comes under rebel control, then definitely there will be tension in and around Upper Nile."
Oil firms in South Sudan, a country the size of France, include China National Petroleum Corp, India's ONGC Videsh and Malaysia's Petronas. Work in some fields has been suspended.
Peace talks had been due to resume last week, but were held up by a rebel demand that four remaining political prisoners held by the government be released and the Ugandan military, which is supporting Kiir's army, withdraw from South Sudan.
Government officials privately acknowledge negotiations are unlikely to make progress until the senior political figures are freed. The government says the detainees tried to launch a coup.
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