Serbian media reports said refugees evacuated the town in panic, prompting fears of a flight by thousands of civilians from nearby Banja Luka, the main Serb bastion in northern Bosnia.
Bosnian Serb "president" Radovan Karadzic was in Prijedor when the shells began to fall. He appealed to the United States to use its diplomatic influence to enforce the cease-fire that began Thursday.
The Bosnian Serb army said the attack on Prijedor was spearheaded by the Moslem-led government army's Fifth Corps which captured Sanski Most, 30 kilometers to the south, earlier this week.
Serb commanders reported halting a Fifth Corps push east from Sanski Most in the direction of Banja Luka.
The scale of the fighting contrasted with assurances by Bosnian President Alija Izetbegovic and UN special envoy Yasushi Akashi that the cease-fire would take hold.
UN military officials were more pessimistic, concerned that the Fifth Corps and its Croat allies would not stop until they reached Banja Luka in a grab for territory before peace talks start at the end of the month.
The town, temporary seat of the Bosnian Serb government and its army general staff, is a strategic and industrial prize whose loss would be the most stunning Serb reversal in more than three years of war.
At the start of the conflict, when superiority in tanks and artillery made them almost invincible, the Serbs drove thousands of Moslems and Croats from the Banja Luka region where they created a string of detention centers whose conditions prompted international protest.
Aid officials said Banja Luka's fall would unleash a humanitarian catastrophe with up to 700,000 refugees of all ages driven east to find secure Serb territory.
Many of them are already living in desperate conditions, some in the open, after being forced to leave their homes by a Moslem-Croat offensive across northwestern Bosnia last month.
With the cease-fire apparently in good shape elsewhere in Bosnia, Izetbegovcic said during a visit to the Czech Republic that he expected it to hold.
"Both sides now have good reason for the cease-fire to be observed. I'm sure this cease-fire will hold ... No one really expected the fighting to stop suddenly everywhere," he added.
Akashi was also optimistic, telling reporters in Zagreb: "Some local soldiers may want to make some attempts, but on the part of top commanders, there's a firm and clear resolve not to fight."
The UN Security Council, anxious to halt the fighting, demanded full compliance with the cease-fire and urged the rival armies to stop driving civilians from their homes.
The sides will meet in the United States at the end of the month for peace talks that international mediators hope will lead to agreement on the division of Bosnia between Serbs and a Moslem-Croat federation.
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