- Council members say Eritrea aids Somali rebels
* Measures include arms embargo, asset freeze, travel ban
* Eritrea warns of new cycle of conflict in Horn of Africa
By Patrick Worsnip
UNITED NATIONS, Dec 23 (Reuters) - The U.N. Security Council was set to impose sanctions on the Horn of Africa state of Eritrea on Wednesday because of aid council members say it has given to Islamist insurgents in Somalia.
The United States and other nations accuse Eritrea of supplying al Shabaab rebels with funds and arms as they fight to topple a fragile U.N.-backed transitional government in Somalia, a state that has been virtually lawless for 18 years.
Eritrea has repeatedly denied the allegation.
A resolution expected to garner the support of all Security Council members but one imposes an arms embargo. It would also impose asset freezes and travel bans on Eritrea as well as individuals and companies to be designated by an existing sanctions committee. Those hit would include members of Eritrea's leadership.
A draft of the resolution obtained by Reuters demands that Eritrea "cease arming, training, and equipping armed groups and their members including al Shabaab, that aim to destabilize the region" and also resolve a border dispute with Djibouti.
The resolution says "Eritrea's actions undermining peace and reconciliation in Somalia as well as the dispute between Djibouti and Eritrea constitute a threat to peace and international security."
Eritrea would be the first new country to be subjected to U.N. sanctions since Iran in December 2006.
Council members say Uganda originally drafted the resolution after the African Union called on the 15-nation body in May to punish Eritrea over its role in Somalia. But Eritrea has charged that its true author is the United States.
"CYCLE OF CONFLICT"
In a letter to the council last week describing the sanctions as "ludicrous punitive measures," Eritrea's U.N. ambassador, Araya Desta, warned that the move risked "engulfing the region into another cycle of conflict as it may encourage Ethiopia to contemplate reckless military adventures."
Eritrea's regional rival, Ethiopia, invaded Somalia in 2006 with tacit U.S. backing to rout an Islamic courts movement from Mogadishu. It withdrew its troops earlier this year.
In a telephone interview with Reuters last week, Desta insisted that "many African nations do not support the idea of sanctions." He said Eritrea was urging the AU to hold another meeting next year to discuss the sanctions issue.
Despite official AU support for sanctions against Eritrea, the organization's current chair, Libya, is expected to be the only Security Council member not to vote for the resolution. Libya has a two-year seat on the council, but holds no veto.
A U.N. arms monitoring body, set up to record violations of a 1992 arms embargo on Somalia, has said Eritrea was sending munitions and giving logistical support to Somali rebels.
There is little sign the latest attempt to establish a central government in Somalia is proving any more successful than previous efforts since a dictator was ousted in 1991. (Editing by Chris Wilson)