With less than a month to go before the Olympics open in Beijing, Chinese police have shot dead five members of a Muslim ethnic minority they said were bent on waging holy war inspired by al-Qaeda and setting up an independent state.

Several dozen police entered a residential building hunting for three men believed to have attacked an ethnic Han Chinese woman in a city hairdressing salon in late May but opened fire after an officer was wounded as they tried to enter an apartment to make an arrest, it was reported.

One witness said he heard several dozen shots about three minutes after the police entered the building. He said he counted about 20 police vehicles entering the compound and saw plainclothes police wearing body armour and equipped with light firearms.

State media said when police raided the apartment where 15 ethnic Uighurs were hiding, several rushed out wielding knives, shouting "sacrifice for Allah".

One officer said the police were forced to use teargas and to open fire, killing five on the spot and wounding two. The wounded were taken to hospital and the other nine people were captured. Witnesses said they saw four ambulances arrive in the compound within 20 minutes of the shooting.

Some 30 knives, the biggest measuring 50 centimetres long, were found in the apartment. There was no report that more serious weapons such as guns, grenades or explosives had been found.

The police officer said: "The suspects confessed they had all received training on the launching of a 'holy war.' Their aim was to kill Han people, the most populous ethnic group in China whom they took as heretics, and found their own state."

The incident in Urumqi, the regional capital of the far western Xinjiang region bordering Kazakhstan, was the deadliest encounter to be reported for years between Chinese security forces and suspected militants from the Uighur minority.

The Uighurs, who are engaged in a low-intensity insurgency to demand an independent state of East Turkestan in Xinjiang province, have been blamed for sporadic incidents of violence although no serious attacks have been reported in China for more than a decade.

Washington accuses one group of being linked with al-Qaeda.

China has repeatedly warned of a terrorist threat from Xinjiang and announced at least five separate raids this year in the region that have foiled attacks. In April, police said they crushed a group that was plotting to kidnap foreign journalists, tourists and athletes during the Olympics. In January, police in Urumqi said they broke up a group whose leaders were planning to stage attacks in Beijing and Shanghai with toxic materials and explosives.

Chinese Vice President Xi Jinping, the top official responsible for the Olympics, said yesterday that security was the single most important factor for a successful games. "A safe Olympics is the most significant symbol of a successful Olympics in Beijing, and also the most important symbol to display the national image of China."

In the latest sign of how determined China is to ensure a smooth Olympics, Beijing will from next week place hundreds of security staff at checkpoints on roads into the city with sniffer dogs and metal detectors.

China has been increasing anti-terror preparations and the top police official last year labelled terrorism as the biggest threat to the event. But this causes a dilemma for a Government eager to show the world that China is a stable nation where visitors can travel without fear of violence. The last known Uighur attack was in 1997 in Urumqi when bombs placed in buses killed nine and wounded seventy-four.