By Phil Stewart and David Lewis

WASHINGTON/NAIROBI (Reuters) - The United States believes Eritrean soldiers have crossed into Ethiopia to help Prime Minister Abiy Ahmed's government battle a rebellious northern force, despite denials from both nations, a U.S. government source and five regional diplomats said.

Abiy and Eritrea's President Isaias Afwerki signed a peace pact ending two decades of hostilities in 2018 and now regard the Tigray People's Liberation Front (TPLF) as a mutual foe.

The U.S. assessment creates a potential policy predicament as Washington views Ethiopia as a major ally in the volatile Horn of Africa but accuses Eritrea of severe rights abuses.

Evidence of Eritrean involvement cited in the U.S. view of the month-long war includes satellite images, intercepted communications and anecdotal reports from Tigray region, five diplomats and a security source all briefed on the U.S. assessment told Reuters.

A U.S. government source confirmed Washington's growing consensus, which has not previously been reported but matches accounts by some residents, refugees and TPLF leaders.

"There doesn't appear to be a doubt anymore. It's being discussed by U.S. officials on calls - that the Eritreans are in Tigray - but they aren't saying it publicly," the U.S. government source, who has been privy to the internal calls, told Reuters.

A senior diplomat from another country concurred, saying "thousands" of Eritrean soldiers were believed to be engaged.

The U.S. State Department did not confirm the U.S. conclusions, though a spokesman said it would view any proven Eritrean involvement with great concern and that its embassy in Asmara was urging restraint to officials.

Contacted by Reuters on Saturday, Eritrea's Foreign Minister Osman Saleh Mohammed said: "We are not involved. It's propaganda."

Ethiopia has denied its old foe entered the conflict, though Abiy did say last week some government troops retreated into Eritrea early in the conflict and were given assistance. His spokeswoman told Reuters queries should be directed to Eritrea.

Claims by all sides are near-impossible to verify because most communications to Tigray are down, and the government tightly controls access.

Abiy won a Nobel Peace Prize last year for making peace with Eritrea, but the presence of Eritrean troops on Ethiopian soil would alarm Western allies. Ethiopia hosts the African Union, its security services work with Western allies, and its troops serve in peacekeeping missions in South Sudan and Somalia.

Eritrea has for years faced accusations of large scale rights abuses, including jailing opponents and forcing citizens into lengthy military or government service. It accuses Western powers of smear campaigns and luring Eritreans abroad, which they deny. [L8N2ID2YQ]

POLICY CONUNDRUM

Ethiopia-Eritrea ties were mostly icy under the TPLF-dominated government that ruled Ethiopia for nearly three decades in increasingly autocratic fashion before Abiy took office in 2018.

Cameron Hudson, a former CIA officer and director for African affairs at the National Security Council, said the U.S. government was divided about speaking publicly over Eritrea.

"That is, I think, due to a divide within the State Department between those seeking to maintain access to Abiy and those willing to call his own abuses," said Hudson, now senior fellow at the Africa Center at the Atlantic Council think tank.

The TPLF claims to have killed and captured large numbers of Eritrean troops in the last month, but has provided no evidence. It has fired rockets into Eritrea at least four times, the U.S. State Department says.

Eritrean troops are believed to have entered Ethiopia in mid-November through three northern border towns: Zalambessa, Rama and Badme, two of the diplomats told Reuters.

The diplomatic sources and the U.S. government source did not have information on the numbers Washington believes have crossed, nor their weapons or role in the war.

Mesfin Hagos, a former Eritrean defence minister who broke with Isaias, said in an article for online publication African Arguments that the Eritreans sent in four mechanised divisions, seven infantry divisions and a commando brigade, citing sources in the defence ministry, opposition and personal contacts.

Some Ethiopian refugees in Sudan told Reuters they saw Eritrean soldiers in the north of Tigray, and that the border town of Humera had been hit last month by rocket or artillery fire from the Eritrean side of the border.

"People died, and they were scattered," said a barber from Humera, adding that he saw about 40 bodies after one barrage and helped bury some of them.

Soldiers suspected to be Eritreans were also spotted in the regional capital Mekelle, said a resident and two diplomats in touch with inhabitants. Some were reported to be in Eritrean uniforms, one of the diplomats said. Others wore Ethiopian uniforms, but spoke Tigrinya with an Eritrean accent and drove trucks without license plates, the resident said.

The United Nations has expressed concern about reported violence against 96,000 Eritrean refugees in Tigray.

TPLF leader Debretsion Gebremichael told Reuters that Eritrean soldiers had raided two camps and abducted some residents but provided no evidence.

Eritrea's Osman denied that, saying: "We are not repatriating Eritrean refugees. If Eritreans want to come back, they can."

A U.N. security team trying to visit one of the camps on Sunday encountered uniformed Eritrean troops, two diplomatic sources told Reuters. The team - including two international staff - was denied access, shot at and detained, they said.

U.N. officials declined to comment. Eritrea did not immediately respond to requests for comment.

But Redwan Hussein, a spokesman for the Ethiopian government's task force for the Tigray crisis, told reporters the U.N. team had broken through two checkpoints. "When they were about to break the third one they were shot at and detained," he said.

Ethiopian officials have accused the TPLF of manufacturing fake Eritrean uniforms to bolster their claims and increase pressure on the government to accept international mediation.

The TPLF denies this.

(Editing by Andrew Cawthorne, Alexandra Zavis and Nick Tattersall)