* French President says working with Nigeria, Cameroon to locate them
* Nigerian source says trying to free hostages in Borno state (Recasts with Hollande, quotes)
By Elizabeth Pineau and Ibrahim Mshelizza
PARIS/MAIDUGURI, Nigeria, Feb 21 (Reuters) - Seven French hostages abducted by suspected Nigerian Islamist militants have probably been separated into two groups and efforts are continuing to locate them, French President Francois Hollande said on Thursday.
French, Nigerian and Cameroonian officials earlier denied French media reports that the seven family members, who were seized in Cameroon on Tuesday and taken over the border, had been freed.
"It's best to work discreetly for now to identify the exact place where our citizens are being held - most likely in two groups - and work out how we can free them under the best conditions," Hollande told reporters.
Paris was "fully cooperating" with Nigeria and Cameroon, he added, noting that French troops were nearby as their base was in the Chadian capital N'Djamena, 150 km (93 miles) away.
The Nigerian military located the hostages and kidnappers between Dikwa and Ngala in the far northeast, a Nigerian military source in Borno said earlier on Thursday, asking not to be identified.
Dikwa is less than 80 km (50 miles) from the border with Cameroon where the three adults and four children were taken hostage on Tuesday.
A senior Cameroonian military official declined to comment, saying the matter was too sensitive.
French gendarmes backed by special forces arrived in northern Cameroon on Wednesday to help locate the family, a local governor and French defence ministry official said.
Citing a Cameroon army officer, French media reported earlier on Thursday that the hostages had been found alive in a house in northern Nigeria. That was denied by the France, Nigeria and Cameroon.
The abduction was the first case of foreigners being seized in the mostly Muslim north of Cameroon, a former French colony, and highlighted the threat to French interests in West Africa since Paris deployed thousands of troops to Mali to oust al Qaeda-linked Islamists who controlled the country's north.
But the region - like others in West and North Africa with porous borders - is considered within the operational sphere of Boko Haram and fellow Nigerian Islamist militants Ansaru.
On Sunday, seven foreigners were snatched from the compound of Lebanese construction company Setraco in northern Nigeria's Bauchi state, and Ansaru took responsibility.
Northern Nigeria increasingly is afflicted by attacks and kidnappings by Islamist militants. Ansaru, which rose to prominence only in recent months, has claimed the abduction in December of a French national who is still missing.
Three foreigners were killed in two failed rescue attempts last year after being kidnapped in northern Nigeria and Ansaru, blamed for those kidnaps, warned this could happen again.
"Staging a successful rescue is always difficult, but even more so if the kidnappers are waiting for it," said Peter Sharwood-Smith, Nigeria country manager of security firm Drum Cussac.
"After the death of three European hostages in rescue-intervention attempts last year, Nigeria and France will be hoping for a peaceful resolution. The problem could be the kidnappers lack of enthusiasm for negotiation or deals. The fact that four of the hostages are children adds further difficulty to the decision for France and Nigeria."
The kidnapping in Cameroon brought to 15 the number of French citizens being held in West Africa. (Additional reporting by Elizabeth Pineau in Paris, Tansa Musa in Yaounde, Joe Brock in Abuja and Bate Felix and John Irish in Dakar; Writing by Bate Felix and John Irish; Editing by Michael Roddy)