About 200 rebels attacked the northern city of Esteli on Wednesday and engaged government troops in fierce fighting, in the worst outbreak of violence since Nicaragua's civil war ended in 1990.
An attacker and a little girl were killed, and one soldier was wounded in the assault, about 60 miles north of Managua, the Interior Ministry said.
The army sent tanks, attack helicopters and troop reinforcements to put down the attack, which reportedly was made by former Contra rebels and discharged soldiers.
"There is fighting inside the city. They have taken over some installations of the National Police and have others under siege, but army installations have not been affected," army spokesman Lt. Col. Ricardo Wheelock told the leftist Sandinista movement's Radio Sandino.
Radio Sandino said the rebels tried to seize the nearby towns of La Trinidad, Condega and Ocotal, which respectively are about 60, 90 and 150 miles north of Managua. It did not say if they succeeded.
The attackers also kidnaped Nicaragua's ambassador to Honduras, Noel Rivas Gasteazoro, who was on the Pan-American Highway near the town on his way back to Honduras, Foreign Minister Ernesto Leal said. Leal said the rebels were also holding Rivas Gasteazoro's wife, Olga, and their driver, David Delgado.
Wheelock added that the army had not confirmed initial reports that the attackers were rearmed rebels from the U.S.-backed Contras, who fought the Sandinistas during the civil war. Other reports said the rebels in Esteli included former Sandinista soldiers.
But Wheelock quoted the rebels as saying they belong to the Workers and Peasants Revolutionary Front, whose forces are partly made up of former Contra rebels and discharged soldiers.
Since the war ended, bands of former rebels and discharged soldiers have been rearming to protest what they say is President Violeta Barrios de Chamorro's failure to provide promised land and money for resettlement.
Troops and rearmed rebels have clashed occasionally in the Esteli areas in the last two years.
It was the worst violence since Chamorro became president in 1990, ending a decade of civil war.
Though out of power, the Sandinistas have kept control of the army in the Chamorro administration.