Myanmar's government reached a breakthrough in talks with two major armed ethnic groups after the most substantive negotiations this year on ending decades of ethnic violence, participants said on Tuesday

The deals, which follow other signs of reform in one of the world's most oppressive and isolated countries, were struck during weekend cease-fire negotiations with armed ethnic rebels near the border with Thailand and could help pave the way for a lifting of U.S. and European sanctions.

Although Myanmar's recent reforms have earned praise from U.S. President Barack Obama, both the United States and European Union say the former British colony also known as Burma needs to improve its human rights record before sanctions can be lifted.

U.S. Secretary of State Hillary Clinton, who travels to Yangon next week, said on October 18 she wanted to see real elections in Myanmar, more political prisoners freed and an end to terrible conflicts with ethnic minorities.

The government appeared to make tentative progress to resolve at least some of the unrest between the military and ethnic armies that control border areas with China and Thailand. Saturday, Minister of Railways Aung Min led a government delegation in discussions with five of the armed ethnic groups.

Kyaw Yin Hliang, who attended the meetings on behalf of a civil-society group called Myanmar Egress, said two of those groups -- the Karen National Union (KNU) and the Shan State Army-South -- had agreed with the government to move the cease-fire talks forward on a state and national level.

That marked a breakthrough for both sides, he said, and signalled a shift in tone. The talks focussed on achieving a lasting peace instead of securing just a cease-fire, he added.

The ultimate goal is different this time around. The previous talks were about reaching a cease-fire only. These talks are now about achieving peace, he told Reuters. This time they are putting a lot of emphasis on the grassroots level.

Government negotiators have met twice with the KNU, in September and last week, and once with the Shan State Army-South, according to an official close to the government negotiating team.

DECADES OF UNREST

Numerous ethnic militias have battled for decades with the central government to preserve de facto autonomy held by groups such as the Shan, Wa, Kachin, Karen and Mon.

Ceasefires have been agreed previously but no political deals have ever been made for lasting peace.

The latest talks follow other signs of change under a nominally civilian government that took office in March after nearly 50 years of iron-fisted army rule.

Another source close to the talks said they were in a delicate confidence-building phase.

The government, selected in an election last year that Western governments and rights groups derided as a sham, has defied critics with reforms that have included loosening some media restrictions and freeing of more than 200 political prisoners.

If the talks gain traction, they could herald a new era in a decades-long struggle for national unity and open the door to better relations with the West.

Ko Ko Hlaing, chief political adviser to President Thein Sein, told Reuters on the sidelines of the East Asia Summit in Bali, Indonesia, last week that coming changes would directly address improving treatment of ethnic minorities.

He said the government aimed to pacify Karens and other ethnic groups with economic incentives, not violence.

Myanmar's army has battled since June with the Kachin Independence Army (KIA) and has clashed with the Shan State Army. Both Shan and Kachin states border China, the country's biggest economic ally, which is concerned conflicts will harm its energy interests in the region.

There was no word of progress with the KIA, which is among the most resolute in its reluctance to surrender arms.

In the run-up to an election last year, the first in two decades, the junta ordered ethnic groups to disarm and join the political process, promising to give militias jobs in an army-run Border Guard Force and hinting the groups would be crushed if they refused.

Several smaller groups agreed, but the larger armies ignored the call. Although there has been low-level fighting this year, no major government offensive has so far been launched.

The government rarely acknowledges publicly that its troops are engaged in combat with ethnic militias but in a televised speech in August, President Thein Sein said state officials in Kachin had been in talks with the KIA and that he hoped there would be a peaceful solution.

(Writing by Jason Szep; Editing by Nick Macfie)