* UN calls for dialogue as well as military preparations
* Algeria opposes foreign intervention in Mali and elsewhere
* Advocates talks, but not with "terrorists, criminals"
By Alistair Lyon
ALGIERS, Oct 14 (Reuters) - North African heavyweight Algeria is worried by the chaos in neighbouring Mali, where Islamist militants have seized vast tracts of the country, but believes foreign intervention will only make things worse.
Much is at stake for Algeria, Africa's biggest country and a wealthy oil and gas exporter that shares a 2,000 km (1,250 mile) border with Mali and sees itself as a major regional power.
It is still recovering from its own conflict with armed Islamists in which international human rights groups say more than 200,000 people were killed over two decades.
Algeria has no desire to see Mali become the "Afghanistan" of the Sahel, a desert region that spans nearly a dozen of the world's poorest countries on the Sahara's southern rim.
But nor does it want to act as the West's proxy policeman, a reluctance which puzzles some of its neighbours.
"Algeria is the only force in the Sahel with the expertise, capabilities and the means to intervene to tackle al Qaeda there. I don't understand why it refuses to intervene," said an ambassador from a Sahel country, who asked not to be named.
Algiers has advocated a diplomatic solution in Mali since Tuareg rebels and Islamists captured two thirds of the country after an army coup in Bamako in March. The Islamist militants, some linked to al Qaeda, later hijacked the revolt in the north.
Algeria gave a guarded welcome to Friday's U.N. Security Council resolution asking African regional groups and the United Nations for a Mali military intervention plan within 45 days, saying it included "numerous elements" of its own position.
To Algerian satisfaction, the French-drafted U.N. measure urges Mali to engage in dialogue with Tuareg rebels if they cut links with groups such as al Qaeda in the Islamic Maghreb (AQIM) and the Movement for Unity and Jihad in West Africa (MUJWA).
A security source said Algeria itself held talks this month with the militant Ansar Dine group which seeks to impose strict Islamic law in Mali and which has close links with AQIM.
There was no word on the outcome of the talks, which local analysts suggested may have been an attempt to persuade Ansar Dine to cut ties with AQIM to qualify as a negotiating partner.
Mali's main Tuareg rebel group, the MNLA, thrust to the sidelines by its Islamist allies-turned-rivals, last week softened its secessionist stance to try to win Western support.
"We declare a right to self-determination, but that doesn't mean secession," said Ibrahim Ag Assaleh, an MNLA official. In April his group declared an independent state in Mali's north called Azawad to redress grievances about government neglect.
The African Union, West African body ECOWAS, the United Nations and others meet in Bamako on Oct. 19 to discuss plans for Mali, which have so far focused on possible action by an ECOWAS force, although any military move may be months away.
The same day, the United States will launch a "strategic dialogue" with Algeria, which it sees as a vital ally in the fight against al Qaeda, especially its North African arm AQIM.
Nevertheless, Algeria, which fought a bitter eight-year independence struggle against France from 1954 to 1962, is deeply sceptical about any military meddling in Mali.
Algiers opposed the NATO campaign in Libya, is against any similar action in Syria's uprising and often cites the unhappy outcomes of U.S.-led wars in Iraq and Afghanistan.
"It recognises that military approaches usually generate unintended consequences," said Geoff Porter, director of North Africa Risk Consulting. "It is very concerned that a military approach will simply lead to further instability."
The upheaval in Mali is at least partly a consequence of last year's overthrow of Libyan leader Muammar Gaddafi, whose Tuareg fighters fled southwards into Niger and Mali, while weapons spilled out of Libya to Islamist and other armed groups.
Algiers also fears for the fate of its diplomats kidnapped in Mali, where several militant groups are led by Algerians.
MUJWA says it has already killed one of seven Algerian diplomats abducted in the northern town of Gao. Algiers has not confirmed this. Four of the diplomats have been freed.
Yet Algeria's aversion for foreign intervention sits uneasily with international and African concern about Mali, so it has tempered its position to avoid appearing isolated.
Abdelkader Messahel, Algeria's pointman for North African and African affairs, said after a trip to Mauritania, Mali and Niger last week that talks among Mali factions, including those demanding independence, should be encouraged.
"But for organised crime and terrorism which is a threat to our countries, there is no room for negotiation," he declared.
Lyes Boukraa, a security expert whose views usually reflect the Algerian government's, argued that combating terrorism requires good intelligence, rather than a heavy troop presence.
"Why should Algeria take a risk that may have a negative impact on its internal security?" he asked.
Foreign intervention might also unify militants and win them more recruits to chase the "infidels" from the region, said Anis Rahmani, security expert and editor of Algeria's Ennahar daily.
"A military intervention is needed in Mali to end al Qaeda's presence there, but it has to be undertaken by Mali."
Given the evident incapacity of the Bamako government to reclaim the north without outside help, Algeria's challenge is to make its "political solution" work fast before France's drive to orchestrate an African-led military one materialises.