Russian security forces today used an armoured personnel carrier to smash through the wall of a shop where suspected Islamic militants were holding two hostage.

The dramatic rescue took place as police across the city tried to put down the last traces of rebel resistance in the city of Nalchik, after more than a day of fighting that left at least 108 people dead.

Soldiers shot grenades through the barred window of a gift shop in the city centre, then pulled out the hostages alive. Three militants were killed in the storming, Deputy Prosecutor General Vladimir Kolesnikov said.

Zaur Makhsiyev, whose 20-year-old sister Leyla was inside the gift shop, said she was uninjured but suffering the after-effects of an unspecified gas presumably used to incapacitate the militants.

By midday, the head of the regional government, Gennady Gubin, announced that all rebel resistance in the southern Russian city had been suppressed, all hostages had been freed and the city was being searched for rebels, the Interfax news agency reported.

"It is bad that such bandit raids are still possible here (in Russia)," Vladimir Putin, the Russian President, was reported as saying. "It’s a great tragedy that we are sustaining losses among law enforcement officers and peaceful civilians."

Nalchik is situated in the region of Kabardino-Balkariya - near Chechnya, where rebels have been fighting Russian forces for most of the past decade.

The rebels’ strategy has been to sow instability across the south. They have capitalised on discontent caused by grinding poverty in the Caucasus Mountain region to swell their recruits, and have bought off corrupt officials to get weapons, unleashing terrorist bombings and hit-and-run attacks against police.

The president of Kabardino-Balkariya, Arsen Kanokov, told Interfax that close to 150 militants were involved in the attack and most of them were local residents.

"The population’s low income and unemployment create the soil for religious extremists and other destructive forces to conduct an ideological war against us," Kanokov was quoted as saying.

Local officials said that yesterday’s fighting began after police started an operation to capture about ten militants in a suburb of Nalchik. Children were evacuated from Nalchik’s School No. 5, which is near a police station and the anti- terrorism centre, conjuring chilling memories of Beslan. Black smoke billowed from the building as panic-stricken parents searched for their children in the school yard.

At the airport, passengers on one charter flight had to wait inside their plane on the runway as Russian forces drove the rebels back. The rebels also raided a private weapons store.

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