* Western "bullies" are "dead wrong" -President Kagame
* Says freezing aid an injustice, will make Rwandans defiant
* Rwandan, Congo leaders fail to resolve row at UN meeting
* Rebel crisis fuels tension in Africa's most volatile region
By Jenny Clover
KIGALI, Oct 4 (Reuters) - President Paul Kagame said on Thursday Western governments were "dead wrong" in blaming Rwanda for the rebellion in neighbouring eastern Congo and threatening Kigali with aid cuts, and he pledged to stand firm against his accusers.
The United States urged Rwanda on Monday to publicly condemn rebels who have seized parts of Congo's east, an appeal that highlighted U.S. frustration over Kigali's alleged involvement.
Kagame has not openly denounced the M23 insurgency, and instead told parliament that wanton killings were being carried out in the Congo "in broad daylight" but not being condemned by that country's government or by the West.
"Even with these threats every day, threats of aid, threats of what, whatever it is you have, you are just dead wrong ... The attitude of the bullies must be challenged, that's what we live for, some of us," he said.
Kagame said those responsible for Congo's bloodshed were indigenous to tiny Rwanda's giant central African neighbour.
"There is a bigger territory where worse things are happening ... So if you ask me to condemn people or to blame them for anything, I know where to start from."
Rwanda has denied having any links with rebels, including the M23 group, who have been fighting Democratic Republic of Congo (DRC) government soldiers in North Kivu province since April, displacing some 470,000 civilians.
PUNITIVE AID CUTBACKS
Donors, including the United States, one of Kigali's closest allies, have slashed aid to the tiny central African nation as the result of a U.N. report that concluded Rwandan officials were supplying the rebels with weapons and logistics.
"This persecution of people even at an international level is just unbecoming," Kagame said to applause by members of parliament in front of ambassadors who were in the assembly.
"Freeze aid to Rwanda, freeze, freeze ... This injustice does not make us compliant, this injustice makes us defiant."
The EU said this week in Kigali that although existing projects would continue, a decision on additional budget support would be delayed until Rwanda's role in Congo was clarified.
Countries including the United, Sweden and the Netherlands have suspended aid to Rwanda, which relies on donors for about 40 percent of its budget. But Britain unblocked part of its aid earlier this month, saying the Rwandans had constructively engaging in the search for peace in Congo.
Kagame has launched a so-called "dignity fund" to help wean Rwanda off its dependence on outside help.
Kagame and Congolese President Joseph Kabila met on the sidelines of the U.N. General Assembly last week to discuss the fighting in the Congo, but no breakthrough was made.
U.S. Secretary of State Hillary Clinton met both leaders to push for a solution, only for Kabila to allude to Rwanda's alleged support for M23 in his speech before the U.N. General Assembly last Tuesday.
Observers have lauded Rwanda's economic progress since the 1994 genocide but say lack of political freedom and media curbs have hampered reforms. Kagame has rejected the accusations.ï¿½
Kagame said Kigali should not be blamed for Congo's woes.
"For over a decade you keep blaming Rwanda for the problems of Congo. Why don't they have enough courage to blame themselves and take part of the responsibility?" he said.
"What is this blackmail about? Aid? .. They give you aid so that forever you glorify them and depend on them. And they keep using it as a tool of control and management."
(Writing by James Macharia; Editing by Mark Heinrich)
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Keywords: RWANDA CONGO DEMOCRATIC/