We must find a compromise between the different positions. I hope that this is possible, but it will be neither simple nor easy

Israeli Prime Minister Shimon Peres

Foreign Minister Shimon Peres said Israel would stop any further seizures of land around the settlements and adopt a stricter policy on new building within their existing boundaries.

But senior Palestinian negotiator Saeb Erekat dismissed the offer, telling the BBC the Israeli move was just a "game of deceit".

Meanwhile, a powerful bomb in a shopping mall in the Israeli town of Netanya is reported to have hurt some 15 people.

'No land grab plan'

Shimon Peres said Israel had no wish to expand the settlements in the West Bank and Gaza Strip, which are illegal under international law.

"We are suspected of wanting to grab these lands for our settlements, although this is not our intention," Mr Peres told Israeli television.

BBC Jerusalem correspondent Hilary Andersson says the Israeli compromise is a gesture of goodwill but that it is not clear yet that it will be enough to kickstart a serious peace initiative.

Israel has been coming under increasing international pressure recently over the settlements.

Inspecting the wreckage of an Israeli helicopter raid

A report by an international panel into the Palestinian-Israeli violence, headed by former US Senator George Mitchell, said: "The cessation of Palestinian-Israeli violence will be particularly hard to sustain unless Israel freezes all settlement construction activity."

There are an estimated 200,000 settlers living in the West Bank and Gaza Strip.

Israel rejects the Mitchell report's recommendation on freezing settlements - the Palestinian Authority insists the report be implemented in full.

'War crime'

"We don't hear the word 'freeze'. We hear a game of deceit [with the Israelis] saying they will continue with the settlements, with the housing units being built within the settlements - and that's Israeli expansion, and that's the real problem," Palestinian negotiator Saeb Erekat said in a BBC interview.

The installation of a population of the occupying power in occupied territory is... in principle a war crime

Rene Kosirnik, regional ICRC chief

Israel defends the settlement policy, maintaining that the West Bank and Gaza Strip are disputed territory, not occupied land, and therefore the Geneva Convention does not apply.

It also says that the Oslo interim peace accords of 1993 call for Israel and the Palestinians to determine the fate of the settlements in peace negotiations.

But liberal Israeli critics of the government's policy say there are thousands of vacant apartments in the settlements, and so the authorities can easily afford to halt new construction.

The settlements themselves have been branded a "war crime" by the regional head of the International Committee of the Red Cross (ICRC), Rene Kosirnik.

The Israeli Government said it was shocked by his remarks and accused the ICRC of abandoning its neutrality.

There was more fighting overnight with gun battles in the West Bank and Gaza Strip.

A Palestinian mortar was also fired from the Gaza Strip into Israel on Thursday night.