Violence escalates as Sharon battles leadership challenge

GAZA - Israel launched a new air strike in the Gaza Strip, warning Palestinian militants it would deliver a crushing response if they did not stop rocket attacks on the Jewish state.

The worst surge of violence since Israel's pullout from Gaza on September 12 after 38 years of occupation put pressure on a shaky ceasefire and on Prime Minister Ariel Sharon as he tried to beat off a rightist leadership challenge over the withdrawal.

Israel killed two Hamas militants in its first air strikes in the Gaza Strip since the pullout. Palestinian witnesses said 20 civilians were wounded in the air strikes.

Israeli ministers later held an emergency session and decided to resume targeted assassinations of Palestinian militants, said a source who took part in the meeting but declined to be identified.

"The response will be crushing and unequivocal," Defence Minister Shaul Mofaz said in a warning to Palestinian militants if they did not halt the rocket attacks.

In the latest air strike, an Israeli helicopter fired two missiles in the northern Gaza Strip. A military source said the missiles targeted buildings used by militants. There were no immediate reports of any casualties.

Israeli forces massed near the border with Gaza but ministers decided to hold off launching a ground offensive.

A senior Army commander, Major General Israel Ziv, said the operation to stop the rocket attacks would go on for as long as required and would be stepped up if necessary.

The Army said about 40 rockets had been fired into Israel since Saturday. Militants said the rocket attacks were in retaliation for a blast that killed 15 people at a Hamas rally.

Israel denied responsibility for the blast and the Palestinian Authority said it appeared to have been an accident caused by Hamas members carrying explosives.

Vowing vengeance, the military wing of Hamas said it was "time to strike with all our might".

Hamas has so far largely abided by a truce Palestinian President Mahmoud Abbas agreed with Israel in February and which helped smooth the Israeli pullout from Gaza.

Palestinian officials condemned "Israeli aggression", but Abbas also strongly criticised militants for keeping explosives in built-up areas, calling their actions a "massacre".

"It has become imperative now more than ever to stop ... armed parades and disruptions in civilian areas at the expense of serious work and of the rule of law," said Abbas.

The Army sealed off the West Bank and Gaza, denying entry to Palestinians allowed to work in Israel.

Israeli troops arrested 207 suspected Islamic militants in the West Bank, said an Army spokeswoman.

The violence could have an impact when Sharon battles today to hold on to the leadership of his ruling Likud Party in a showdown triggered by rightist rival Benjamin Netanyahu's opposition to the Gaza pullout.

The vote by Likud's more than 3000 central committee members could turn Israeli politics on its head, and prompt Sharon to leave the party and form a new centrist alliance that surveys show would be very popular with voters.

Opinion polls show the outcome is too close to call, although Netanyahu - who quit as Sharon's Finance Minister in August over Gaza - has a slight lead among central committee members in the run-up to the vote.

Polls also show a new centrist alliance headed by Sharon would secure 76 seats in Israel's 120-member Parliament, while a Netanyahu-led Likud would be decimated.

- REUTERS