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Nothing much usually happens in Nalchik, capital of the obscure Caucasian republic of Kabardino-Balkaria. Mostly, tourists come to ski or climb in mountains that include Europe's highest, Elbrus. They buy honey and fruit from roadside markets or enjoy an easygoing approach to nightlife that particularly appeals to travelers from more conservative regions. The sleepy little republic, which is home to a mix of ethnic Russians and Muslims, was also largely free of the insurgency that has set much of the North Caucasus — Chechnya, Dagestan, Ingushetia — aflame. Even when the security services cracked down on alleged radical Islamists, closing mosques and harassing bearded men, few people took note.

All that changed last week when around 100 heavily armed guerrillas fanned out across the city to attack at least 10 major government targets. The sudden assault completely surprised authorities, all the way to Moscow. For 24 hours, the rebels besieged Nalchik, leaving terrified inhabitants with nothing but wildly inaccurate reports from the official media to explain what was going on. By the time local security forces and reinforcements from neighboring republics regained control, the city of 250,000 bore all the grim scars of urban warfare: bodies sprawled on sidewalks, in back alleys and outside apartment blocks and official buildings. Kids roamed the streets collecting shell casings.

"We never thought this would happen here," says Anastasia Zaitseva, whose workplace, a hotel opposite the Federal Security Service (fsb) headquarters, was on the front line. "We always believed this tragedy would pass us by." Instead, the persistent insurgency in the North Caucasus keeps spreading — and what began in late 1994 as a war of secession in Chechnya is mutating into an Islamist jihad as it spills across the region.

Russian officials have regularly dismissed rebel threats to expand the war. Yet over the past two years fighting has progressed west from Chechnya to Ingushetia and North Ossetia, where last year hundreds died in the Beslan school siege. In the past 12 months, there have been almost daily attacks in Dagestan to the east. Now, the insurgency has moved north into Kabardino-Balkaria. Chechen secessionist websites hailed what they called a successful operation by the "Kabardino-Balkaria section of the Caucasus Front," praising it as proof that the strategy introduced by the Chechen insurgency's new leader, Abdul Khalim Sadulayev, was working. The 37-year-old cleric took over after his more moderate predecessor, Aslan Maskhadov, was killed in March. Since then, the tone and tactics of the conflict have taken a firmly radical turn. Rebel leaders go beyond criticizing the West's failure to denounce Russia's brutal tactics in Chechnya; they increasingly reject Western values based, they say, on "materialism and atheism." A "discussion document" circulating among Chechen guerrillas singles out Afghanistan's Taliban regime as the most theologically consistent modern Islamic state. The Islamist cast of the Nalchik attackers suggests that Russian President Vladimir Putin now faces a growing threat from religious radicals determined to push the fight deeper into Russia.

The siege of Nalchik started around 10 a.m. on an ordinary Thursday morning, just as shops and offices were opening. The fighters appeared out of nowhere, swarming across the city. They hit the headquarters of the fsb and Interior Ministry, several large police stations, and a prison. At the fsb, a minibus carrying six armed men in uniforms and ski masks pulled up in front of the building. They clambered out of the van and charged. Evgeniya Sokurova, the manager of the Rossia Hotel just opposite, noticed them. "I said, 'It looks like there are training exercises going on,'" she recalls. "Then there was an enormous explosion."

Some attackers probably got into the building, since at one point Russian snipers across the way took fire from the spot. Most of the men from the minibus soon retreated to a nearby souvenir shop, where they holed up with hostages. The area quickly turned into a battle zone. A guerrilla sniper took down four soldiers as they ran across the square, killing at least one. Another rebel was cut off and took cover in a car in the middle of the square; hours later, hotel staff watched as he leapt out and sprinted under covering fire to the souvenir shop.

While local forces called for more help to quell the assault, Moscow downplayed the drama. Four hours after the attack began, the Kremlin announced it was all over. But sporadic clashes erupted during the night, and the next morning, guerrillas were still inside the souvenir shop and held a police station. Eventually, a group of élite Russian Spetsnaz soldiers with gas masks and small grenade launchers edged along the side of the souvenir shop. Shortly before their assault, Russia's Deputy Prosecutor General, Vladimir Kolesnikov, stressed that women were being held hostage inside. "We have to act with surgical precision," he said. Under cover of heavy machine-gun fire, the Spetsnaz pumped round after round of grenades into the small shop. After half an hour, they abruptly ceased fire and slipped off as quietly as they came. Journalists were told the hostages had been saved, though no one could explain how they survived the barrage.

A look at the corpses on the ground showed the guerrillas were mostly in their early twenties, well-armed and generously supplied with ammunition. Security officials were stunned by something else, too. According to one fsb officer, "amazingly, they were all locals," many from the city itself. Though the attackers included a sprinkling of Chechen and Ingush fighters, security officials say most were from an Islamic guerrilla group called Yarmuk that only recently surfaced. The cell first called for jihad in August 2004, and gained some local prominence with small attacks later that year. After last week's violence ended, officials variously described the attack as an attempt to seize arms or even capture the city. The guerrilla teams were big enough to terrorize, but not to hold their targets. It was not clear whether any rebels made away with stolen weapons.

For the guerrillas, the Nalchik raid was a savage, politically successful piece of armed propaganda. Many of the fighters seemed ready to die, and many did, though the death toll is hard to gauge as both sides distort casualty figures. A government source, who wished to remain anonymous because his estimate deviates from the official line, thinks at least half the attackers were killed. He put the losses among police and troops at more than 30, with about the same number of civilian deaths.

Those who saw Putin that day say he was furious at news of the assault. He issued crisp instructions that anyone bearing arms in the city who resisted arrest should be "eliminated." But the Nalchik raid has forced the Kremlin to confront the fact that it is fighting a war on more fronts than just Chechnya. Despite regular announcements of major victories there, Russian forces are merely holding their ground. Now Putin, his forces already stretched thin, will have to mount defenses in other republics as well. Nevertheless, Russian leaders hailed a victory for federal forces in Nalchik and promised to clean up the city quickly. The physical scars may well disappear soon, though Nalchik — and perhaps the North Caucasus as a whole — will never be the same.

• PAUL QUINN-JUDGE / Nalchik
• Why the attack on Nalchik by Islamic insurgents signals a disturbing new phase in the Chechen war