Israeli incursions into the Palestinian Authority are continuing amid claims that a plot by Israeli forces to assassinate Mr Yasser Arafat have been uncovered.
Seven people have been killed in the bloody aftermath of the assassination of Israeli cabinet minister, Mr Rehavam Zeevi.
Three Palestinians, including Mr Atef Abayat, a militant on Israel's most-wanted list, were killed yesterday in a blast that tore through a car in the West Bank city of Bethlehem.
In the early hours of this morning, Israeli forces moved about 100 yards into Palestinian-controlled Bethlehem during a battle with gunmen in which at least four Palestinians were wounded, witnesses said. The Israeli army had no immediate comment.
Meanwhile Israel has dismissed claims by an aide to Mr Arafat, that the Israelis had hatched a plot to kill the Palestinian President.
"The Palestinian Authority has discovered Israeli plans to assassinate President Yasser Arafat and other Palestinian leaders," Nabil Abu Rudeina said.
Palestinians also said Israel killed Mr Abayat, a commander of militants belonging to Mr Arafat's Fatah faction.
Israel said Mr Abayat was responsible for the deaths of five Israelis and suggested he was preparing a car bomb that detonated prematurely.
After the explosion, gunmen in the Bethlehem suburb of Beit Jala fired at Gilo, a Jewish settlement which Israel regards as a neighborhood of Jerusalem. Soldiers returned fire as tracer bullets marked the revival of a battlefront dormant for weeks.
Straining an increasingly brittle cease-fire further, Palestinian gunmen killed one Israeli civilian and wounded two others near the West Bank city of Jericho. The Israelis were on a jeep tour of the Judean desert when they were ambushed.
Earlier, a 10-year-old Palestinian girl and two Palestinian policemen died during fighting that ensued after Israeli tanks and infantry rumbled into Palestinian-controlled parts of three West Bank cities, Nablus, Jenin and Ramallah.
The bloodshed and threats by Prime Minister Ariel Sharon of tougher retribution could deal another blow to US-led peace efforts that Washington had hoped could boost Arab support for its offensive in Afghanistan.
Mr Sharon threatened even tougher action in response to the assassination of ultra-nationalist Tourism Minister Rehavam Zeevi by gunmen from the radical Popular Front for the Liberation of Palestine (PFLP).
"The murder... crossed the red line and created a new situation which requires a change in the pattern of action by the army and security forces," a statement issued by Mr Sharon's office quoted him as saying.
He repeated his ultimatum to Mr Arafat to arrest the assassins of Mr Zeevi's and to hand them over to Israel.
"If the Palestinian Authority does not meet these conditions, Israel will view the Authority as supporting and hosting terrorism and act toward it in accordance with international guidelines," Mr Sharon said.
It was a clear threat from Sharon that Israel could attack the Authority much in the same way the United States has struck at Afghanistan's Taliban.
Mr Mohammed Dahlan, a Palestinian security chief, accused Israel of pursuing an "assassination" policy that has claimed the lives of some 67 Palestinians since the revolt began.
"If the Israeli government insists on this policy, it will not bring peace and security to the Israelis. It will push both (sides) to pay a very high price for this foolish policy," Mr Dahlan said.
In an escalating exchange of bitter accusations, a high-profile aide to President Arafat, Mr Nabil Abu Rdainah, said the Palestinian leader told European diplomats in Gaza that Israel had a plan to assassinate him.
Palestinian police acting on Mr Arafat's orders arrested five PFLP members. But Palestinian officials, who had previously refused to turn over militants wanted by Israel, showed no signs of bowing to the latest Israeli demands.
The US State Department, responding to yesterday's Israeli incursions in the West Bank, said both sides should avoid steps that inflame the situation and complicate measures to achieve calm.
It also called on Mr Arafat to arrest the killers and bring them to justice but side-stepped a dispute between Israel and the Palestinians over where any trial should take place.
"That's something for the two sides to work out," State Department spokesman Mr Philip Reeker said in Washington.