The African Union urged Egypt and Ethiopia Wednesday to come together for talks to solve a bitter dispute over the sharing of Nile river waters triggered by an Ethiopian dam project.

AU Commission chief Nkosazana Dlamini-Zuma's appeal came after Egypt angrily warned that "all options are open" over Ethiopia's diversion of a section of the Blue Nile for the dam.

"There should be discussions around these issues... aimed at having a win-win situation," she said. "Both countries need the water."

Ethiopia has pledged to press ahead with construction of the $4.2 billion (3.2 billion euro) Grand Renaissance Dam, set to become Africa's biggest hydroelectric dam when completed, despite Egypt's fury.

"If a single drop of the Nile is lost, our blood will be the alternative," Egyptian President Mohammed Morsi warned on Monday .

"We are not warmongers, but we will never allow anyone to threaten our security."

   Egypt, which fears the project may diminish its water supply,   says its 

"historic rights" to the Nile are guaranteed by two treaties from 1929 and 1959 which allow it 87 percent of the Nile's flow and give it veto power over upstream projects.

But a new deal was signed in 2010 by other Nile Basin countries, including Ethiopia, allowing them to work on river projects without Cairo's prior agreement.

Talks between the two countries should focus on finding on a solution "in a new context, not in the context of the colonial powers," Dlamini-Zuma said without elaborating.

Ethiopia dismissed Egypt's threats as "empty and violent rhetoric."

"Intimidating Ethiopia by putting on the table all the options, including war, is for us a non-starter, we won't be subdued with this," foreign ministry spokesman Dina Mufti told reporters on Wednesday.

Ethiopia last month began diverting the Blue Nile a short distance from its natural course for the construction of the dam, but has assured its neighbours downstream that water levels would not be affected.

A study by international experts on the dam's impact on the river has been submitted to Egypt and Sudan, which also relies on Nile resources and supports Ethiopia's hydro-electric project.

Egypt has dismissed the study's findings, which minimise the dam's impact, and has called for further assessments.

The first phase of the Grand Renaissance Dam is expected to be complete in 2016 and will generate 700 megawatts of electricity. When the entire project is complete it will have a capacity of 6,000 megawatts.

The Egyptian foreign minister is expected to visit Ethiopia in the coming days, although no date has been confirmed.

"That visit is welcome... we will see what will happen. We will cross that bridge when we come to it," Dina said, adding that Ethiopia has no plans to seek mediation from the AU.

"We hope we will overcome this impasse by ourselves," he said.

Ethiopia plans to export electricity from the dam to neighbouring Sudan, Djibouti and Kenya and is funding the massive project on its own.

The Blue Nile joins the White Nile in the Sudanese capital Khartoum to form the Nile, which then flows through Egypt.