* Four prisoners to be released, meeting key rebel demand
* Kiir sacks army, intelligence chiefs
* Conflict increasingly fought along ethnic lines
* U.N. says readying sanctions against both sides (Recasts with prisoner release, re-writes throughout)
By Carl Odera
JUBA, April 24 (Reuters) - South Sudan will free four high-profile political prisoners facing treason charges, a presidential spokesman said on Thursday, meeting a demand by rebels in a faltering peace process.
President Salva Kiir has come under mounting pressure as rebel fighters loyal to Kiir's sacked deputy, Riek Machar, seize territory and close in on northern oil fields that provide the country's economic lifeline.
Kiir sacked his army chief on Wednesday, replacing him with a loyalist from his own ethnic group as the country's four-month conflict appears increasingly fought along ethnic lines.
Kiir had accused the four detainees - a former ruling party official, national security minister, deputy finance minister and ambassador to Washington - of fomenting a coup when fighting erupted between soldiers loyal to him and his rival Machar in mid-December. They faced nine charges each.
"For the sake of peace, these people will be freed. This is a ministerial order," presidential spokesman Ateny Wek Ateny told Reuters. But South Sudan's justice minister said Machar should still face trial for attempting to overthrow Kiir.
There was no immediate reaction to the impending releases from the rebels.
Machar told Reuters in January the detention of political rivals was a ploy to scupper peace talks, but diplomats have questioned both sides' commitment to resolving the crisis. Talks are due to restart on April 28 after repeated delays.
Their resumption comes as international anger escalates over the increasingly ethnic dimension to the violence and talk of sanctions intensifies among donors and at the United Nations.
The violence in the central African state, the size of France, has mainly pitted Kiir's Dinka people against Machar's Nuer. Thousands have been killed and more than one million people uprooted from their homes.
In a security reshuffle, Kiir appointed General Paul Malong, a Dinka, as head of the Sudan People's Liberation Army (SPLA), replacing General James Hoth Mai.
"Malong is a Kiir loyalist and a Dinka hardliner," said one analyst who did not wish to be identified.
Mai was the most prominent Nuer within the SPLA, a former guerrilla force which became the national army of the south after the end of the civil war with Sudan in 2005. He had been seen as an emblem of Dinka-Nuer cooperation within the military.
Kiir also replaced his head of intelligence
Calls have grown louder in east Africa and in Western capitals for tough action to be taken against spoilers of the peace process from both sides after hundreds of civilians were massacred last week in the northern oil town of Bentiu.
The United Nations said rebels slaughtered men, women and children hiding in a mosque, church and hospital after capturing Bentiu, picking out their victims according to their ethnicity. The rebels have denied the allegation.
Rebel spokesman Lul Ruai Koang said Machar's forces took over Renk town and were nearing Paloch in Upper Nile state, the biggest oil installation in the country. The rebels urged oil companies to halt production and evacuate staff.
Army spokesman Philip Aguer, however, said the SPLA had fought off rebels in Renk. Access to the remote area is difficult for journalists, making it hard to independently verify the accounts.
Kenya's parliament on Thursday voted to send 300 troops over the border into South Sudan to help peacekeeping efforts. A parliamentary committee said it would urge Kenyan President Uhuru Kenyatta to freeze the assets of relatives and friends of Kiir and Machar until there was peace. (Additional reoprting Aaron Masho in Addis Ababa and Drazen Jorgic and Humphrey Malalo in Nairobi; Writing by Richard Lough; Editing by Mark Trevelyan)
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