The Russian account of events is confused. Prime Minister Vladimir Putin later blamed the attack on rival local groups.

The BBC's Jonathan Charles: "Women and children are among the dead"

Top EU officials clashed with Mr Putin at a summit meeting in Helsinki, where they urged him to begin immediate talks on ending the conflict.

The BBC's Angus Roxburgh says the city's arms bazaar was located next to the market place where ordinary people sold food and clothes.

The Times' correspondent Anthony Loyd: These rockets have massive impacts

Russian forces are meanwhile continuing to close in on Grozny and are believed to be well within range of the city to launch rocket attacks.

City in panic

The attack is said to have sparked widespread panic in the city and flood of refugees is expected to leave.

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The latest attacks have sparked a new wave of refugees

The incident has led to renewed international calls for a peaceful end to the crisis.

The United States has also expressed its concern about reports of heavy civilian casualties and the growing number of refugees in the region.

Already more than 177,000 refugees have fled the fighting.

'Bandits and terrorists'

Russian military spokesman Alexander Veklich said the timing of the attack precluded the possibility that civilians would have been in the area.

"Civilians don't walk at night time in a place where arms are sold to bandits and terrorists. Those hit in the attack were arms peddlers supplying bandits," he said.

Hospitals are reported to be overwhelmed by the casualties

A reporter for the French news agency, AFP, counted 27 bodies at the maternity hospital - most of them women and new-born babies.

The hospital is situated about 25m from the Chechen presidential palace leading to speculation that ii may have been hit by a missile gone astray. The palace itself was not hit in the attack.

Chechen commanders have vowed to defeat any Russian troops sent into Grozny. The city was the scene of a humiliating defeat for Russian forces on 1 January 1995.

The Russian operation in Chechnya began three weeks ago when federal forces entered the territory with the aim of eliminating Chechen rebel fighters.

Russian ministers have repeatedly insisted that they are trying to limit civilian casualties.

They say air strikes against rebel bases are being conducted with pinpoint accuracy, but earlier attacks on villages elsewhere in the republic are reported to have caused heavy civilian casualties.

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