Acccording to Serbian TV, up to 20 civilians died in the attack.

Nato's spokesman Jamie Shea said one laser-guided missile veered off course from the army barracks it was targeting and impacted 200 to 300 meters away in a residential area of Surdulica.

Jacky Rowland in Belgrade: Rescue workers are still searching for survivors

"A precision-guided weapon failed to guide accurately to the designated target," said Mr Shea.

He said Nato could not judge how many civilian casualties resulted from the error.

(Click here to see a map of last night's Nato strikes)

Clive Myrie in Kukes, Albania: There is a remarkable consistency in the refugee accounts

In another development, the UNHCR said it suspects that one of the most significant massacres of Kosovo Albanians so far has taken place around the north-eastern Kosovo town of Jakovica.

The agency says consistent accounts from refugees who were arriving overnight in Albania suggest that between 100 and 200 people were rounded up and killed.

Residential area devastated

Belgrade's Deputy Mayor Milan Borsic: "Six of them [missiles] have missed"

According to official Serbian television, the bomb killed up to 20 civilians and destroyed around 300 homes in Surdulica on Tuesday. The television report said the death toll was expected to rise.

Foreign journalists in the area said there were harrowing scenes as rescuers tried to retrieve body parts from the wreckage of houses as bulldozers cleared huge mounds of concrete rubble searching for more victims.

Jamie Shea said the other bombs that were part of the attack destroyed the barracks, and added that Nato's record of collateral damage remained excellent.

"We have not and will not target civilians," he added.

The latest setback to the alliance's stated ambition of avoiding civilian casualties came as the alliance's military commander in Europe, General Wesley Clark warned of an escalating air campaign to force a Yugoslav climbdown over Kosovo.

Space running out

In Albania, 2,000 people, mostly women and children, arrived over Tuesday night.

The refugees, mainly from Jakovica, gave accounts of mass killings and other alleged atrocities carried out by Serbian forces.

More than 3,000 people crossed into Macedonia on Wednesday, in the biggest refugee influx for more than a week.

The came despite a warning by aid agencies that they have run out of space at border camps.

The United Nations refugee agency in Albania is trying to move the refugees away from the border amid concerns about attacks by Serbian snipers .

Serbian snipers and artillery have been targeting Kosovo Liberation Army positions just a few kilometres from the camps.

Peace efforts falter

The United Nations Secretary-General, Kofi Annan, has said the search for a diplomatic solution to the crisis over Kosovo will be long and complex.

He was speaking in Berlin after talks with the American envoy, Strobe Talbott, who briefed Mr Annan on his discussions in Moscow over Russia's potential role as a peace-broker.

The BBC's Bridget Kendall: Moscow is playing it both ways

Strobe Talbott said Belgrade has shown no sign of agreeing to a five-point plan, approved by the UN, Nato and the EU.

"We have not had anything from Belgrade that suggests that Belgrade is yet prepared to move in that direction," Mr Talbott said.

In Moscow, the Russian Foreign Minister, Igor Ivanov, said the situation was extremely difficult but there were still possibilities for a political way out.

Mr Annan is due to travel to Moscow to meet Russian, German and Greek officials later on Wednesday, to discuss Russia's potential role as a peace-broker.

Belgrade bunker bombed

On the 35th night of strikes against targets in Yugoslavia, Nato jets attacked a fuel dump near the central Serbian town of Pozega, the Yugoslav state news agency Tanjug rpoted.

Belgrade was also a target during the night.

The Beta news agency reported heavy smoke rising from two military barracks in the city suburbs, but said the military compound was evacuated well before the strikes began.

However, the barracks grounds are believed to contain an underground bunker which the Yugoslav President, Slobodan Milosevic, reportedly often uses.

According to Serbian media, a new broadcast facility for state television in Belgrade was also hit.

In Kosovo, Nato targeted ammunition dumps and radar installations.

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