Palestinian activists have sworn to avenge the death of a member of President Arafat's elite guard who was killed by a missile strike on his car.
The attack was launched from an Israeli helicopter flying over the Gaza Strip yesterday morning. A teenage Palestinian boy was killed in a separate incident in Gaza where heavy gun battles raged during the day.
Witnesses said Mr Masoud Ayad (54) tried to get out of his car after the first of three missiles struck it near the Jabalya refugee camp in northern Gaza. Hundreds of sympathisers gathered around the wreckage afterwards, shouting "Death to Israel".
"Anyone who intends to harm Israelis will not escape and the long arm of the Israel Defence Forces will know how to locate and even the score with him," Israel's caretaker Prime Minister, Mr Ehud Barak, said in a statement.
The Israeli army claimed Mr Ayad had been establishing a Palestinian branch of the Lebanese guerrilla group Hizbullah in Gaza and also alleged that he was behind bullet, bomb and mortar attacks on Jewish settlements in Gaza.
Palestinians said the dead man had been a senior officer in Force 17, Mr Arafat's elite force. The Palestinian Authority described the killing as an ugly crime, adding that it was part of an Israeli assassination policy which had led to the deaths of at least 20 activists in recent months.
Hospital officials in Gaza said Israeli troops shot Bilal Ramadan (14) in the heart near the Karni crossing in Gaza. A Palestinian security official said he had been killed by an Israeli sniper using a silencer. The Israeli army denied the report.
"We did not kill the boy," a spokesman said, adding that he might have been the victim of internal feuding among the Palestinians. There were further clashes in the divided West Bank town of Hebron where Israeli soldiers fired rubber-coated bullets at Palestinian stone-throwers.
On the political front, further progress was made in talks between the Likud and Labour parties towards the formation of a national unity government under Israel's Prime Minister-elect, Mr Ariel Sharon. "We would like to settle all outstanding problems in one way or another by Sunday," a Labour spokesman said after the two sides met in Jerusalem.
Mr Sharon's Likud has only 19 out of 120 seats in the Israeli parliament, the Knesset. If he cannot win the support of Labour he will have to form a narrower alliance of right-wing and religious parties in time to approve the 2001 budget by March 31st.
Under a draft agreement, which had yet to be formally approved by both parties, the new government would seek an interim peace agreement with the Palestinians.
Meanwhile, the difficulties of the Palestinian economy arising from the current troubles were highlighted by a UN special envoy, Mr Terje Roed-Larsen. "As we speak, the Palestinian Authority is facing an impending fiscal crisis," he said.
He warned: "We may witness a collapse of some Palestinian institutions, which may lead to chaos and anarchy, which is the greatest threat to the security of both peoples, as well as to the regional stability."
Israel has sealed off the West Bank and Gaza Strip during the fighting. The Israeli Government says this is aimed at preventing attacks within its territory, but the Palestinians say the blockades are a form of collective punishment barring tens of thousands of people from getting to work in Israel.
Meanwhile, Mr Arafat arrived in Amman for talks with King Abdullah. He flew to the Jordanian capital from Tunis where he had met President Zine al-Abidine Ben Ali.