The raging violence in the Middle East dominated the agenda as the leaders of Britain, Canada, France, Germany, Italy and Japan joined the Russian and US presidents in Putin's home city.

In pre-summit talks, US President George W. Bush and Russian host Vladimir Putin appealed for calm but were only able to paper over their differences on Israel's devastating military offensives in Lebanon and Gaza.

While Bush put the blame firmly on Lebanon's Shiite Hezbollah militia for rocket attacks on Israel and capturing Israeli soldiers, Putin said the Jewish state's response had to be measured.

"We are concerned about violence. We are troubled by the loss of innocent life," Bush said, demanding Hezbollah "lay down its arms" and end attacks on Israel and urging Syria to pressure it into doing so.

Russia says diplomacy the only solution

Putin insisted that "recourse to violence must be balanced and it must be stopped as soon as possible," saying the G8 leaders would do all they could.

Neither leader resorted to the stronger language used by their governments earlier in the week.

It was left to Russian Defense Minister Sergei Ivanov to voice fears of a regional war, warning of a "real threat of involvement of other states in this conflict."

"On the one hand, the capture of prisoners and shelling the territory of another state is absolutely unacceptable," Ivanov said, referring to the Shiite Hezbollah militia in Lebanon.

"On the other hand, the use of military force on such a scale and against such targets I think is also unacceptable, or at least disproportionate," he added, referring this time to Israel.

"Whether we like it or not the only way of resolving this very difficult situation is to return to the negotiating table," Ivanov said.

"Summit shouldn't be a talking shop"

Germany called for a halt to the spiraling violence with

Foreign Minister Frank-Walter Steinmeier calling on "all concerned parties in the region to take an active part in de-escalation," according to a ministry statement, after a telephone conversation with Lebanese Prime Minister Fuad Siniora.

According to an edition of news magazine Der Spiegel due to appear Monday, Germany is actively involved in the search for peace at the request of several Western states.

It claims that Berlin, through Chancellor Angela Merkel, had sought to use its influence with Israel at the request of President George W. Bush.

"The implications are very serious and we need to assess it with urgency," British Prime Minister Tony Blair's spokesman warned.

"This (summit) shouldn't be a talking shop. It should be setting an agenda which will help de-escalate the situation."

Israel's offensive was launched three weeks ago in Gaza and this week in Lebanon to secure the release of three soldiers seized by militant groups and to halt their rocket attacks on the Jewish state.

The military campaign has left more than 90 dead in Lebanon alone as well as scores in Gaza and brought widespread international condemnation.

Bush, Putin clash over democracy, WTO

Meanwhile Bush also clashed with Putin over democratic reforms, an issue he had promised to raise here.

Pressing issues like a free press and religion, he proposed war-torn Iraq could be a model for Moscow. "I told him that a lot of people in our country would hope Russia would do the same thing," Bush said.

To which Putin retorted, to laughter: "We certainly would not want to have the same kind of democracy as they have in Iraq."

"Just wait," Bush replied.

Separately, Russian and US negotiators failed despite intensive talks here to overcome lingering obstacles to a bilateral accord enabling Moscow to join the WTO, which sets global trade rules.

Bush said Washington supported Moscow's 13-year quest to join the WTO and a deal was "almost reached" but "there's more work to be done."

Putin admitted the difficulties, saying national interests were at stake.

"I can't say that we were not expecting such a complication," he said. "We will continue to work, defending our interests and the interests of our growing economy."

Russia is currently the only major power operating outside WTO trade rules, and agreement here would have confirmed its rising status as a commercial and economic powerhouse.

Russia and the United States adopted what a US official billed as a global initiative against nuclear terrorism, a control and monitoring mechanism aimed at keeping atomic materials out of the hands of extremists.

Russia cracks down on protestors

Meanwhile Russian riot police broke up a planned march by communist activists Saturday protesting against the summit of G8 world leaders in Saint Petersburg.

Around 100 communists gathered in the centre of the former Tsarist capital despite a ban on any rallies during the summit, which ends Monday.Eventually they were allowed to hold a meeting in a site four kilometers (2.5 miles) away but were refused permission to unfurl any banners or chant slogans.

Riot police intervened when some of the activists tried to demonstrate on the street, causing scuffles which led to the arrest of at least 10 people.

Among slogans which could be heard were "G8 outlaws" and "world without G8, Russia without Putin," referring to Russian President Vladimir Putin.

Valentin Romanov, a communist deputy in the Russian parliament, criticized the ban on the rally as excessive.

"You have to take security measures but you also have to respect people. These security measures are excessive when the summit is taking place outside Saint Petersburg."

The tight security measures for the G8 club's annual summit have also led to a clampdown on anti-globalization protesters who have been confined to a stadium far from the event.