* Tensions at highest level since July
* Disputes have halted nearly all oil production
WASHINGTON, April 21 (Reuters) - U.S. President Barack Obama urged the leaders of Sudan and South Sudan on Saturday to stop the fighting between their countries and begin negotiations to settle their disputes, saying there was still a chance to avoid war.
In a videotaped message to the two bitter foes, Obama sought to prevent further escalation of border hostilities that have raised tensions to the highest level since South Sudan split away as an independent country in July, taking with it most of the country's known oil reserves.
"You still have a chance to avoid being dragged back into war, which only leads to one place - more suffering, more refugees, more death," Obama said.
He called Sudan to stop its military actions against its neighbor, including aerial bombardments, and said South Sudan must end its support for armed groups inside Sudan and also halt cross-border military operations.
South Sudan said on Friday it would withdraw its troops from the disputed Heglig oil region more than a week after seizing it from Sudan, pulling the countries back from the brink of a full-blown war.
Sudan quickly declared victory, saying its armed forces had "liberated" the area by force as thousands of people poured onto the streets of Khartoum cheering, dancing, honking car horns and waving flags.
But South Sudan on Saturday accused Sudan of bombing its troops as they pulled out of Heglig, dampening already faint hopes of any imminent settlement.
South Sudan's seizure of the territory had raised the prospect of two sovereign African states waging war against each other openly for the first time since Ethiopia fought newly independent Eritrea in 1998-2000.
Since South Sudan's secession last year under a 2005 peace deal, the countries have also remained at loggerheads over the position of their shared border and other disputes have already halted nearly all the oil production that underpins both economies.
Obama said the leaders of Sudan and South Sudan "must have the courage to return to the table and negotiate and resolve these issues peacefully." (Reporting By Matt Spetalnick; Editing by Vicki Allen)
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