* Each side blames the other for attack near Bunagana
* Envoys seek dissolution of M23, halt to army action
* Congo government says army to "wipe out" rebel positions
* Uganda says shells land in its territory (Adds Congo government spokesman, rebel leader)
By Kenny Katombe
MBUZI, Democratic Republic of Congo, Nov 4 (Reuters) - C ongolese troops and M23 rebels bombarded each other near the Ugandan border on Monday and international envoys called on both sides to cease fire and allow a peace deal to take hold.
Congolese authorities accused the rebels of shelling the frontier town of Bunagana and said it showed M23's weekend ceasefire declaration was worthless. The rebels said they were ready to sign a peace deal but that they had been attacked.
Thousands fled into Uganda to escape the fighting but some there were wounded by a shell fired across the border.
A rapid army advance in recent weeks has driven rebels from towns and cornered them in the steep, forested hills along the Ugandan border, raising the prospect of an end to a 20-month rebellion that has gripped Congo's mineral-rich east.
South Africa is hosting leaders from the Great Lakes region and southern Africa to back Ugandan-sponsored peace efforts, but the latest violence shows the two sides remain far apart.
"This is not fighting, it is bombs launched by M23 targeting the population of Bunagana," said Congo army spokesman Colonel Olivier Hamuli.
Bunagana was the last rebel-controlled town to be recaptured last week and rebels are still in the hills nearby. A Reuters reporter said government troops had seized Mbuzi, a strategic hilltop above Bunagana, on Monday after hitting it with tank and rocket fire. Seven rebels were captured, he said.
On Sunday M23 announced a ceasefire - a declaration Hamuli described as a lie, saying the army would pursue the rebels. Congo government spokesman Lambert Mende said four civilians were killed when a shell landed in Bunagana's market.
ENVOYS PUSH PEACE DEAL
M23 political leader Bertrand Bisimwa complained that the army had attacked its positions with heavy weapons.
"We're only fighting to defend our position. That's the logic of war," he told Reuters.
Bisimwa said the group was ready to sign the peace deal: "All the items (in the talks) were finished and there's no problem anymore, why is the government refusing to sign?"
Envoys monitoring the conflict for the United Nations, European Union, African Union and United States jointly urged both sides not to undo progress made in the talks in Uganda, saying M23 should renounce its rebellion as agreed and the army should hold off from further military action for now.
However, Mende said the army would continue its advance to "wipe out" rebel positions and Congo's government would assess progress at the talks in South Africa before taking any steps at the Ugandan-hosted peace talks.
The rebellion is the worst faced by President Joseph Kabila since the end of Congo's last major war a decade ago.
In an embarrassment to Kinshasa and the United Nations, M23 seized Goma, capital of North Kivu province, a year ago after troops fled and U.N. peacekeepers stopped protecting the town.
That prompted changes in Congo's army, a stronger U.N. mandate for a beefed-up peacekeeping force and intense pressure on Rwanda to end its alleged support for the rebels. Rwanda has repeatedly denied backing M23.
Congo's army has swept through towns across North Kivu in recent weeks though the advance has slowed as rebels retreated into the hills they used to launch their revolt last year.
Uganda said some shells from Congo had landed on its soil on Monday and border security was being stepped up but it was not clear who had fired them.
An U.N. official in Uganda said thousands of residents were fleeing and 17 had been wounded by shrapnel.
"We were 4 km from the border and the explosions were so bad we had to pull back. The streets are full of people running from the fighting," said the U.N. refugee agency's representative in Uganda, Lucy Beck. (Additional reporting by Pete Jones in Kinshasa, Elias Biryabarema in Kampala and David Lewis in Dakar; Writing by David Lewis; Editing by Alistair Lyon)
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