Mourners demanded revenge for the Palestinian deaths

As the army continued what it called a "clearing operation", two Israelis were injured when Palestinian gunmen opened fire on a crowd of Israelis in the divided West Bank town of Hebron.

The escalation of violence left an already fragile ceasefire agreed between Israel and the Palestinians last week in shreds and dealt a serious blow to US efforts to garner Arab support for a global anti-terror coalition.

Israeli army sources said two Israeli women were wounded - one seriously - when Palestinians fired on a group of Jewish worshippers.

Thousands of Israelis had gathered in the town to celebrate the Jewish festival of Succot at the Tomb of the Patriarchs, a site holy to both Muslims and Jews.

In Gaza, meanwhile, thousands of Palestinians attended the funerals of the two militants killed by Israeli troops in the raid on Alei Sinai.

Mourners carried the yellow flags of Palestinian leader Yasser Arafat's Fatah movement and green flags of the militant Hamas organisation.

US effort to woo Arabs

The BBC's Middle East correspondent Frank Gardner says the violence could not have come at a more awkward time for the US administration.

Sharon wants Palestinian militant groups to be branded as "terrorists"

President George Bush had hoped to keep the Arab-Israeli conflict out of the news as US forces prepare to target the Saudi-born militant Osama Bin Laden in Afghanistan.

The attack on Gaza by Israeli tanks, helicopter gunships and naval gunboats came as US Defence Secretary Donald Rumsfeld headed for the region.

It is bound to complicate his discussions with Arab leaders, who will urge him to restrain Israel or lose their support, our correspondent says.

Click here for map of Gaza Strip

The Islamic militant group Hamas said it was responsible for the Alei Sinai raid, but the Israeli cabinet blamed Palestinian leader Yasser Arafat, saying he was failing to round up militants.

The Israeli cabinet wants Hamas, Islamic Jihad and the Lebanese Hezbollah to be added to the list of terror groups compiled by the US Government.

Shells are reported to have hit the offices of the Palestinian national security body in Gaza City and other Palestinian security positions were also targeted.

'Clearing operation'

"We have begun a clearing operation to see where and how the terrorists got into the (Jewish) settlement of Alei Sinai. We are levelling Palestinian police posts," Reuters news agency quoted a military source as saying.

Hundreds of Palestinians rallied in Gaza early on Wednesday to protest against the incursion.

Israel's retaliation followed a three-hour crisis meeting overnight by the Israeli security cabinet.

A BBC correspondent in Jerusalem, Peter Biles, said the military action is not unexpected, given that Israel's deadline for Yasser Arafat to enforce a ceasefire ran out on Tuesday.

The Palestinian leader strongly condemned the raid on Alei Sinai, and said that everything possible was being done to find the culprits.