Defence Minister Binyamin Ben-Eliezer said the decision should not be interpreted as a surrender to "terrorism" and that Israel reserved the right to respond when it wanted.

On another front, Israeli Prime Minister Ariel Sharon is facing a key policy battle within his own party over the question of a Palestinian state.

Members of the right-wing Likud party are threatening to propose a vote stating that the party would never accept Palestinian sovereignty at a meeting of the party's central committee on Sunday evening.

We reserve the right to respond when we want and how we want - period

Binyamin Ben-Eliezer, defence minister

Mr Sharon has said he envisages a Palestinian state at the end of a long peacemaking process. But his main challenger for leadership of the Likud party, Binyamin Netanyahu, does not support such a move.

Analysts say that if the vote is passed, it could tie Mr Sharon's hands in future peace efforts and weaken his position within the party.

Gaza apprehensive

In the Gaza Strip, a Palestinian was reported to have shot dead his Israeli employer at a Jewish settlement in the southern Gaza Strip.

The man was arrested, an army spokesman said.

Residents in Gaza, home to one million Palestinians, have been bracing for an Israeli incursion since the suicide bombing in a suburban Tel Aviv pool hall killed 15 Israelis.

Voices from the Conflict

I am a big believer in the Bible and in Jewish history... The Arabs are just occupying land that doesn't belong to them

Rifka Goldschmidt, Israeli settler in Gaza  Read her story

The Palestinian bomber - who was also killed - was initially thought to have come from the Gaza strip.

The Israeli Government said it had reviewed its response because details of the military plans had been extensively leaked and Palestinian militants had been given too much time to prepare.

But military affairs correspondents in Israel's main newspapers said the leaks were used as an excuse for Israel to refrain from an operation that did not have a consensus either among the people or among security establishment officials.

They reported that some generals had opposed a Gaza operation, warning of heavy Israeli army and Palestinian casualties in the densely populated strip.

Israel had been urged by the US and other foreign leaders not to pursue another military operation in Palestinian territories.

Reports say the fear was that this could bury moves for fresh diplomacy, including a US initiative for a peace conference in the summer.

Bethlehem revived

In Bethlehem, Christians resumed special services at the Church of the Nativity for the first time since the siege of the Palestinian gunmen by Israeli troops there ended two days ago.

The deal allowed 13 Palestinian militants on Israel's most-wanted list to be exiled from the Palestinian territories.

European Union foreign ministers are expected to decide the fate of the men who are currently in Cyprus.

The Cypriot Government says it wants the men to leave by Wednesday.

The men are expected to spend their exile in a European country either separately or together.