* Government demands to know fate of kidnapped foreigners

* Rebels deny holding civilians

(Updates with rebel leader reaction)

By Mohamed Sudam and Mohammed Ghobari

SANAA, Aug 13 (Reuters) - Yemen announced conditions for a ceasefire with Shi'ite Muslim rebels on Thursday, days after government forces launched an offensive against them in the north of the mainly Sunni Muslim Arab country.

Yemen, one of the poorest Arab countries, is battling a Shi'ite rebellion, a wave of al Qaeda attacks and rising secessionist sentiment in the south.

In July 2008, Yemeni President Ali Abdullah said four years of intermittent fighting against the rebels had ended and dialogue should replace combat. But despite attempts to start talks, sporadic fighting has continued and intensified.

The conditions for a ceasefire in the mountainous northern province of Saada include a rebel withdrawal, the removal of rebel checkpoints and the clarification of the fate of kidnapped foreigners, the country's top security body said.

The conditions also require rebels to return captured military and civilian equipment, hand over those behind the June kidnapping of a group of nine foreigners and to refrain from intervening in local authority affairs, it said.

The nine kidnapped foreigners -- seven Germans, a Briton and a South Korean, including three children and their mother -- were kidnapped in the Saada area, a rebel stronghold. Three of them, two German nurses and a South Korean teacher, have since been found dead.

The rebels rejected the truce offer and denied holding any civilians. Rebel leader Abdul-Malik al-Houthi said the truce offer was an attempt to "mislead public opinion" and accused the government of not truly seeking a solution to the conflict.

Fighting between Yemeni troops backed by fighter aircraft and Shi'ite rebels killed and wounded dozens in the north of the country this week, local officials and rebels said on Wednesday.

Houthi said his group "is committed to the peace option", but "if the authorities continue their aggression, then self-defence is a legitimate and sacred right". He accused the state of "committing crimes against humanity in Saada villages".

The rebels belong to the Shi'ite Zaydi sect and want Zaydi schools in their area. They also oppose the government's alliance with the United States. (Reporting by Mohammed Ghobari; Writing by Inal Ersan and Jason Benham; Editing by Jon Hemming)

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