Israeli Foreign Minister Mr Shimon Peres and Palestinian leader Mr Yasser Arafat have met at an economic conference at a secluded Spanish island resort but were not planning formal talks.
Aides poured cold water on speculation Mr Peres and Mr Arafat would hold their first formal meeting since reaffirming a ceasefire on September 26th that has since been undermined by a fresh cycle of tit-for-tat fighting.
The two have been at close quarters since arriving in Majorca yesterday and officials said they met briefly this morning with a Spanish official before they were due to deliver formal speeches to the conference.
Israeli forces are still holding Palestinian-ruled areas in the West Bank, raided in a sweeping military operation after radical Palestinians assassinated a far-right cabinet minister two weeks ago to avenge Israel's slaying of their leader.
Israeli newspapers said the army had intended to withdraw from parts of the Palestinian-ruled city of Ramallah early next week. The possible pullout could be shelved, however, after Palestinians killed an Israeli soldier near Ramallah yesterday.
In overnight violence, the Israeli army said it returned fire after Palestinians fired at its posts in the southern Gaza Strip and near Rafah on the Israeli-Egyptian border.
Palestinian security sources said Israeli troops had destroyed three homes in Rafah refugee camp and sprayed heavy machinegun fire during a pre-dawn incursion 100 metres into the area today.
They said Israeli troops had also surrounded two Palestinian-ruled villages near the West Bank town of Jenin while two airforce helicopters hovered overhead and flares lit up the sky.
Israeli military sources said the army was searching for Palestinian militants who had set off an explosive device in the area earlier. No one was hurt in the blast.