* Traffickers cut heads of migrants who disobeyed orders

* Arrested men are in early 20s; charged up to $1,800 for crossing

* Twenty-six bodies of 200 presumed dead recovered, three children (Changes dateline, add more details from police and witnesses)

By Wladimir Pantaleone

PALERMO, Sicily, Aug 7 (Reuters) - Italy arrested five North African men on Friday on suspicion of multiple homicide and human trafficking in the presumed drowning of more than 200 people, saying they used clubs and knives against migrants.

Most of the dead were locked in the hold of a boat that sank off the coast of Libya on Wednesday. Police said many children were believed to be among those who perished.

Two Libyans, two Algerians and a Tunisian ranging in age from 21 to 24, were placed under formal arrest in Palermo after being questioned on Thursday. Police had earlier mistakenly identified the Tunisian as a Libyan.

Police said the accused men charged the migrants between $1,200 and $1,800 for the voyage, depending on where they would be placed on the deck of the boat. Those in the hold paid about half as much as those above, they added.

The boat was carrying some 650 people. Italian and Irish ships rescued more than 400 migrants and recovered 26 bodies, including three children. Police arrested the men after speaking to survivors during the night after they arrived in Palermo.

A police reconstruction based on witnesses' accounts said three of the men, part of a Libyan-based human trafficking ring, alternated steering the boat while the other two kept watch over the migrants.

"The arrested are suspected of causing the confirmed deaths of 26 migrants and the presumed deaths of about 200 people who, according to witnesses, were locked in the hold of the boat that capsized," a police statement said.

KNIVES, CLUBS AND BELTS

Police said that about three hours into the journey from Libya the boat started taking on water in the hold, which was packed with mostly African migrants.

The traffickers ordered them to bail out the water but they were unable to do so and tried to break out of the hold. They were beaten back with knives, clubs and belts.

Migrants on the deck were ordered to sit on the hatch of the hold to prevent those below from getting out.

The traffickers marked the heads of migrants who disobeyed orders with knife cuts, particularly the sub-Saharan Africans. Arab migrants, on the other hand, were mostly beaten with belts, police said.

The migrants drowned when the boat flipped over as the Irish navy ship LE Niamh approached. The episode was the latest in a long string of recent migrant disasters in the Mediterranean.

In April, a 20-metre (66-foot) vessel capsized as it approached a merchant ship that had come to its assistance, and up to 900 people were killed in the deadliest shipwreck in the Mediterranean for decades.

More than 2,000 migrants and refugees have died so far this year trying to reach Europe by boat, compared with 3,279 during the whole of last year, the International Organization for Migration said.

Traffickers have sent more than 90,000 migrants by sea to Italy so far this year, the UN refugee agency says. Italy took in 170,000 in 2014.

This summer's mass arrivals in both Italy and Greece show the crisis is worsening. Immigrants fleeing violence and poverty at home continue to pour in from Africa and the Middle East.

Many look to move swiftly to wealthier northern Europe, including to Britain from Calais in France. (Writing by Philip Pullella; Editing by Tom Heneghan)