UPDATE 4-Rebels attack power station in Russia's Muslim south

* Two security guards killed, plant halted after dawn raid

* Rebels have threatened to attack economic targets

(Adds Medvedev comment, Olympics details)

By Yevgeny Kayudin

BAKSAN, Russia, July 21 (Reuters) - Suspected Islamist militants in Russia's volatile North Caucasus stormed a hydroelectric plant and killed two guards on Wednesday in an escalation of rebel attacks on Russian economic targets.

The attack in Kabardino-Balkaria was a blow to Kremlin efforts to contain the insurgency on its Muslim southern flank, where rebels stage near-daily attacks on civilians and police.

Power supplies were not disrupted but analysts say the raid shows that rebels are fulfilling their threats to target economic infrastructure as part of their struggle to create an independent Islamic state in the Caucasus.

It also shows that the insurgency, previously contained to Chechnya and nearby regions such as Dagestan, is now spreading beyond the traditional epicentre of violence.

Analysts say Kabardino-Balkaria's proximity to Sochi, where the 2014 Russian Winter Olympics are due to be staged, could pose a headache to the Kremlin. The regional capital Nalchik is only 280 km (174 miles) east of the snow-based component of the Games. Moscow, by contrast, is 1,360 km north.