(Adds State Department comment) By Omar Hassan DJIBOUTI, June 11 (Reuters) - Djibouti called up retired police and soldiers on Wednesday after a clash with Eritrean troops killed at least two and wounded 21 others on their shared border overlooking strategic Red Sea shipping lanes. Eritrea, without confirming or denying the clashes, dismissed Djibouti's statements as "anti-Eritrean." The first fighting since 1996 between two of Africa's smallest states broke out on Tuesday, after a nearly two-month standoff. Djibouti hosts French and U.S. military bases and is the main route to the sea for Eritrea's arch-foe Ethiopia. Djibouti said the clash began after Eritrean soldiers deserted and the Eritreans fired on them, prompting return fire. A second outbreak followed when Eritrean soldiers demanded their deserters back. Fighting continued on Wednesday in the Mount Gabla area of northern Djibouti, Djibouti's Defence Ministry said. Police officers and soldiers who retired from 2004 to 2008 were ordered to reintegrate with their units, a government statement said. Mount Gabla, also known as Ras Doumeira, overlooks the strategic Bab al-Mandib straits, which are a major shipping route to and from Europe and the Middle East. In Washington, the State Department condemned what it said was Eritrea's military aggression against Djibouti. "These hostilities represent an additional threat to peace and security in the already volatile Horn of Africa," State Department spokesman Gonzalo Gallegos said. "We call on both sides to cease all military hostilities immediately and to reduce tensions by withdrawing troops from the border area." Eritrea's Foreign Ministry said it would not "get involved in an invitation of squabbles and acts of hostility." "(Djibouti) has been making continued futile attempts to drag the government of Eritrea into its concocted animosity," a statement said. A Reuters witness at a French hospital in Djibouti said helicopters had ferried in dead and wounded soldiers. 'PICKING A FIGHT' In mid-April, Djibouti accused Eritrea of digging trenches and building fortifications on the Djiboutian side of the frontier. Eritrean President Isaias Afwerki told Reuters in a recent interview that was a "fabrication." "It's just another case of Eritrea picking a fight and finding itself in a position of hostility towards the main Western players in the region," said Patrick Smith, editor of the Africa Confidential newsletter. "Eritrea is sending out a warning to Djibouti in particular saying if it chooses to go with Ethiopia then it's opening itself up to conflict with Asmara," he said. Djibouti's army says nearly 75 percent of its 11,000 troops are now along its boundary with Eritrea, which is one of Africa's most militarised states and has more than 200,000 soldiers as part of a mandatory conscription programme. Djibouti and Eritrea are two of Africa's smallest nations with populations of 820,000 and 4.7 million respectively. Djibouti hosts two foreign military bases, including one of France's biggest overseas contingents and a U.S. counter-terrorism task force of about 2,000 soldiers -- many of them elite special forces who work with Ethiopian troops. Former colonial power France signed a mutual defence pact with Djibouti after independence in 1977. It is also a vital route for landlocked Ethiopia, which has vowed to protect its shipping access in Djibouti if necessary. Ethiopia blamed Eritrea for the clash. "Ethiopia firmly believes that such unwarranted action should be stopped immediately and peaceful and diplomatic solution must be sought for the problem," Bereket Simon, special adviser to Prime Minister Meles Zenawi, told Reuters. Djibouti has turned itself into a regional shipping hub after massive investment from Dubai. Eritrea and Ethiopia fought a border war in 1998-2000 that killed 70,000 people, and lingering enmity has fuelled conflict in neighbouring Somalia and in Ethiopia's Ogaden region. (For full Reuters Africa coverage and to have your say on the top issues, visit: http://africa.reuters.com/ ) (Additional reporting by Jack Kimball in Asmara, Tsegaye Tadesse in Addis Ababa; Editing by Bryson Hull and Matthew Tostevin)
