Armenian and Azerbaijani forces exchanged heavy rocket and artillery fire as fighting intensified over Nagorno-Karabakh on Sunday, with the breakaway region's capital and Azerbaijan's second-largest city hit.

Armenia said that Nagorno-Karabakh's main city Stepanakert, which has been under shelling since Friday, was hit again on Sunday and AFP journalists said there were regular explosions and clouds of black smoke rising in parts of the city.

Azerbaijan's defence ministry said meanwhile that Armenian forces had shelled Ganja, a city of more than 330,000 in western Azerbaijan, with footage showing buildings in ruins.

The two sides accused each other of targeting civilian areas, as the conflict widened a week after heavy fighting broke out in the decades-old dispute over the ethnic-Armenian region.

Armenia and Azerbaijan have resisted international calls for a ceasefire and clashes have intensified in recent days, with both sides claiming victories on the front and saying they are inflicting heavy losses.

In a fiery address to the nation, Azerbaijani President Ilham Aliyev set conditions for a halt to the fighting that would be near-impossible for Armenia to accept.

He said that Armenian forces "must leave our territories, not in words but in deeds" and provide a timetable for a full withdrawal. 

Yerevan must also recognise the territorial integrity of Azerbaijan, apologise to the Azerbaijani people and admit that the region is not part of Armenia, Aliyev said.

- 'Chase them like dogs' -
"Nagorno-Karabakh is our land. We have to go back there and we are doing it now," Aliyev said. "This is the end. We showed them who we are. We are chasing them like dogs."

Sirens were sounding and explosions were heard at regular intervals in Stepanakert, where residents were taking shelter including several families in the basement of the city's Holy Mother of God Cathedral.

Armenia's foreign ministry said Stepanakert and other towns had been hit, accusing Azerbaijani forces of "the deliberate targeting of the civilian population".

There were reports of dead and wounded civilians in Stepanakert and the historic town of Shusha.

Azerbaijan said Ganja was under shell fire, including from areas outside of Karabakh in Armenian territory, with at least one civilian killed.

Karabakh's separatist forces said they had targeted and destroyed an airbase in Ganja, but Baku denied this as a "provocation".

Azerbaijan's ally Turkey accused Armenia of "targeting civilians" in Ganja and reiterated support for its fellow Turkic and Muslim country as "one nation, two states".

Karabakh leader Arayik Harutyunyan warned that it would now consider "military facilities in Azerbaijan's big cities" as legitimate targets.

"I call on the residents of these cities to immediately leave," Harutyunyan said in a post on Facebook.

Azerbaijani officials claimed Sunday that Harutyunyan had been seriously wounded while in a bunker hit by bombing, but his office denied this.

- 'Bombs falling in the yard' -
Azerbaijan claims to have taken control of a string of settlements in recent days as well as a strategically important plateau.

On Sunday Aliyev said his forces had retaken the town of Jabrayil, part of an area outside Karabakh seized by the separatists in the 1990s as a buffer zone, hailing it as an important victory. Armenia denied the claim.

Authorities in both countries have reported nearly 250 dead since the fighting began, including almost 40 civilians. 

Armenian separatist forces have reported more than 200 dead -- including 51 on Saturday -- while Azerbaijan has not released any figures on its military casualties.

Azerbaijan said Sunday that two civilians had been killed in shelling on the southern town of Beylagan, where a journalist working with AFP saw residents picking through the rubble of destroyed homes. 

"I was baking bread when I heard explosions, I opened the door and saw that bombs were falling right into the yard," said one woman, showing journalists the blown-out windows and partially collapsed roof of her home.

- Praying for peace -
In Armenia's majority-Christian capital Yerevan, residents gathered in churches for services Sunday to pray and light candles. 

"I came to ask God for peace, for our country and our soldiers," Aytsemik Melikyan told AFP outside the Saint Sarkis Church. 

Russia, the United States and France -- who co-chair a mediation group that has failed to bring about a political resolution to the conflict -- have called for an immediate halt to the fighting.

Russian Foreign Minister Sergei Lavrov expressed concern over "the increase of casualties" among civilians in a call with his Armenian counterpart on Sunday.

Armenia has said it is "ready to engage" with mediators but Azerbaijan -- which considers Karabakh under Armenian occupation -- says Armenian forces must fully withdraw before a ceasefire can be brokered.

Karabakh's declaration of independence from Azerbaijan during the collapse of the Soviet Union sparked a war in the early 1990s that claimed 30,000 lives.

Talks to resolve the conflict have made little progress since a 1994 ceasefire agreement.