UPDATE 1-Conflict minerals crackdown backfiring in Congo -UN

* U.S. rules boost smuggling of Congo minerals - report

* Former rebel leader controls illicit trade route to Rwanda

* Congo minerals used widely in cell phones, computers (Adds quote on improvements in Katanga, final two paragraphs)

By Jonny Hogg and Graham Holliday

KINSHASA, Dec 30 (Reuters) - A U.S. crackdown on so-called "conflict minerals" in eastern Democratic Republic of Congo has backfired by pushing trade deeper into the hands of criminals, including at least one former rebel leader, a U.N. report said on Friday.

The finding underscores the difficulty faced by both the United States and Congo governments in choking off funding to eastern Congo's roving armed bands, believed responsible for thousands of rapes and killings of villagers.

In an effort to pressure Congo's rebels, the United States adopted a law last year requiring the Securities and Exchange Commission to write rules forcing companies to prove minerals they derived from Congo are "conflict free".

But the rules have not been finalised due to wide opposition from companies and industry groups, creating uncertainty that has led international trading firms to virtually stop all purchases from Congo.

"(This) has mainly led to a loss of production and increased criminality, which I think everyone would agree is not a great result," Gregory Salter, who worked as a consultant for the U.N. report, told Reuters.