General Gennady Troshev, commander of federal forces in Dagestan, told the Interfax news agency that whoever handed over the rebel leader's body would receive the reward, whether they were Chechen or Russian special forces.

The BBC's Angus Roxburgh: "It's the fiercest fighting so far"

"That bandit needs to be liquidated. He has caused too much trouble both to Russia and to his own people," General Troshev is quoted as saying.

The Russian Government says Shamil Basayev led two armed incursions into neighbouring Dagestan earlier this year and was behind a series of apartment block bombings across Russia last month in which almost 300 people were killed.

BBC's Orla Guerin: No hint of Moscow softening its stance

The announcement comes as Russian forces continued to bombard the Chechen capital, Grozny, with airstrikes and heavy artillery as Moscow intensified its operations across the breakaway republic.

According to Russian air force headquarters, there have been air strikes against almost 20 locations over the past 24 hours.

The defence ministry says the areas were rebel strongholds, but they were also centres of civilian population increasing the likelihood of further casualties among ordinary Chechens.

Click here to see a map of the region

Boris Yeltsin has praised his prime minister's handling of hostilities

The attacks are continuing despite mounting international concern over a growing number of civilian casualties and the hundreds of thousands of refugees displaced by the fighting.

Up to 180,000 Chechens have left their homes since Russian bombardments began.

Most have travelled westwards to neighbouring Ingushetia, but that option was cut off at the weekend when Russian forces sealed the border routes out of Chechnya

Russian commanders say the move was necessary to prevent terrorists based in the republic from slipping into Russia.

Chechen resistence

Russian commanders have refused to comment on speculation that a full-scale ground assault on the Chechen capital is imminent saying only that they plan to take control of the city "sooner or later".

Earlier Russian forces were reported as saying they had encountered stiff resistance on when they launched a twin advance towards Grozny.

Heavy fighting was raging on the western and northern outskirts of the city, the head of the Chechen armed forces' press centre, Vakha Ibragimov, told the French news agency AFP.

Zaur Tsitsayev on BBC World Today: 'Three tanks were destroyed'

A spokesman for Chechen President, Aslan Maskhadov, told the BBC that Chechen forces had beaten back a Russian assault on Grozny, destroying three Russian tanks and killing 80 soldiers.

Zaur Tsitsayev said that only 100 Chechen soldiers had been killed since the Russian offensive began on 5 September, but more than 2,600 civilians had lost their lives and thousands more had been wounded.

The figures have not been independently confirmed.

Meanwhile the Russian President Boris Yeltsin has warmly praised Prime Minister Vladimir Putin for his handling of the conflict saying he now had even more respect for him.