The army said all 500 patients and staff were freed unharmed.

The body of one of the Karen rebels is carried out

Burma's military government said Thailand had successfully protected its citizens from what it called the perils of terrorism.

The rebels who took over the hospital were members of an ethnic Karen group known as God's Army, and had been demanding medical treatment for Karen guerrillas.

The security forces stormed the hospital shortly before dawn and fought an hour-long battle the Karen group.

Once the firing stopped, black-clad commandos emerged from the hospital flushed with triumph.

This is a statement from Thailand - you can no longer do this kind of thing to us

Thai National Security Adviser

Ten blood-spattered bodies were lined up outside the complex, and rusty guns and tattered possessions belonging to the teenage hostage-takers were put on display.

However, journalists were not given access to the released hostages to verify the army's claims that no-one was hurt.

Hospital workers applaud Thai commanders

The gunmen had previously released at least 70 people, mostly the sick, elderly, women and children, and 17 others had escaped through a back door. There also were reports that some hostage-takers might have changed into civilian clothes and escaped among the hostages.

Two police officers were wounded in the gun battle.

'Action necessary'

The authorities in Thailand defended the bloody operation, saying the rebels' actions had been an unforgivable affront.

First Army Region Commander Lieutenant General Taweep Suwannasingh told a news conference that the tough response had been necessary.

"If we had prolonged the situation it would have got worse for the patients," he said.

Before the security forces moved in, the authorities had given the impression they would negotiate a peaceful end to the siege.

The rebels were attacked by Burmese forces last week, reportedly suffering heavy casualties. The fighting drove about 1,000 refugees over the border into Thailand.

The hostage-takers had demanded that Thailand open the border to the refugees and stop shelling rebel positions to deter them from coming across.

Tough stance

The Thai authorities had been keen to take a tough stand against the dissidents.

Just three months ago, they allowed a group of rebels who seized the Burmese embassy in Bangkok to go free in exchange for releasing hostages.

Police displayed weapons seized from the Karen group

Two of rebels shot dead at the hospital were involved in the Burmese embassy siege, a Thai foreign ministry official said Tuesday.

The national security adviser to the prime minister, Prasong Soonsiri, issued a strong warning to rebel groups.

"[The raid] is a statement from Thailand that you can no longer do this kind of thing to us. If you are hurt and need medical treatment we are happy to help. But we won't stand sieges."

God's Army is a small group that broke away from Burma's Karen National Union ethnic guerrillas, which has been fighting for greater autonomy for 50 years.

The group is run by 12-year-old twin brothers, Johnny and Luther Htoo, whose followers believe the pair have mystical powers that make them invulnerable during attacks.

It is not known if they were involved in the siege.