PESHAWAR, Pakistan (Reuters) - Pakistan agreed on Monday to restore strict Islamic law in the Swat valley to pacify a revolt by Taliban militants, and a suspected U.S. drone fired missiles in the region killing at least 26 people.

The decision on Islamic law is likely to draw criticism from the United States and other Western powers fearful that Pakistan is playing into the hands of religious conservatives who sympathize with the Taliban and al Qaeda.

The agreement was reached at talks between Islamists and officials of the North West Frontier Province (NWFP) government in Peshawar on Monday.

After successful negotiations ... all un-Islamic laws related to the judicial system, those against the Koran and Sunnah, would be subject to cancellation and considered null and void, said NWFP's Information Minister Mian Iftikhar Hussain, referring to the holy book of Islam and the saying and teachings of the Prophet Mohammad.

Taliban militants in Swat, once a tourist paradise, called a 10-day ceasefire the night before the talks, and on Saturday released a Chinese engineer kidnapped five months earlier as a gesture of goodwill.

An uprising erupted in late 2007 in Swat, an alpine beauty spot favored by honeymooners and trekkers alike, and militants now control the valley just 130 km (80 miles) northwest of the capital Islamabad.

They have destroyed more than 200 girls schools in a campaign against female education, and tens of thousands of people have fled their homes to escape the violence.

By striking a deal on Islamic law, the government hopes that it will be able to drive a wedge between conservative hardliners and those militants who have fallen under the thrall of al Qaeda and the Taliban.

Religious conservatives in Swat have long fought for sharia to replace Pakistan's secular laws, which came into force after the former princely state was absorbed into the Pakistani federation in 1969.

MILITANT NEST

The move came as a suspected U.S. drone fired missiles at a building used by Taliban militants in the Kurram tribal region killing at least 26 people, witnesses and officials said.

The missiles hit a school that was once used by Afghan refugees' children, before militants moved in around two years ago, according to villagers.

The attack was the first in Kurram on the border with Afghanistan and came two days after a missile strike in the South Waziristan tribal region killed at least 25 mostly Central Asian fighters believed to have al Qaeda links.

Afghan Taliban were holding an important meeting there when the missiles were fired, one of the intelligence officials in the area said of the air strike in a mountainous region called Sarpul, on the outskirts of Baggan village.

A militant in Kurram put the death toll lower, but said Afghan and Pakistani Taliban were among those killed.

The attack was the first in the Kurram tribal region and came two days after a missile strike in the South Waziristan tribal region killed at least 25 mostly Central Asian fighters believed to have al Qaeda links.

After the attack in Kurram, Taliban had surrounded the area and were not allowing anyone near, witnesses said.

The drone attack could further inflame tempers in Pakistan where a controversy has raged over a U.S. senator's remarks that the unmanned aircraft were being operated and flown from an air base inside Pakistan.

As I understand it, these are flown out of a Pakistani base, Dianne Feinstein chairwoman of the Senate Intelligence Committee, was quoted as saying by the Los Angeles Times on Friday.

But, Pakistan Foreign Minister Shah Mehmood Qureshi denied the statement and said the drones carrying out these attacks were not operating from Pakistan.

Monday's missile strike was the fourth attack since U.S. President Barack Obama took office last month, showing there was no change in policy since the last year of the Bush administration, when attacks by pilotless aircraft against militant targets on Pakistani territory were ramped up.

Pakistan's civilian government, elected a year ago, and the army have complained that the U.S. missile strikes are counter-productive and have fanned an Islamist insurgency.

On Monday, an unknown militant group holding hostage an American working for the United Nations in Pakistan said on Monday it had extended a deadline they had set to kill him if their demands were not met.

The group, calling itself the Baluchistan Liberation United Front (BLUF) had said on Friday it would kill John Solecki in 72 hours, but on Monday a spokesman said more time would be given for the government to accede to its demands.

Solecki, the head of the office of the U.N. High Commissioner for Refugees (UNHCR) in Quetta, was kidnapped on February 2 after gunmen ambushed his car and shot dead the driver.

(Writing by Sanjeev Miglani; Editing by Bill Tarrant)

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