The Israeli army said it had targeted a metal works shop used to produce weapons.

The Israeli armed forces will continue to damage and destroy the terror infrastructure in the Gaza Strip

Israeli army statement

Palestinian sources said at least two people were injured in the raid in the Zeitouni district.

It came hours after Israeli Defence Minister Binyamin Ben-Eliezer announced a "total ban" on Palestinian travel in much of the West Bank, following a series of attacks by Palestinian militants.

Despite the clampdown, Mr Ben-Eliezer and senior Palestinian ministers met near Jerusalem on Monday night and discussed plans for a ceasefire that would entail a phased Israeli withdrawal from Palestinian areas.

The meeting followed a day of violence in which a suspected would-be suicide bomber died when his explosives detonated prematurely, while three Palestinians and an Israeli couple were shot dead in separate incidents.

'Terror infrastructure'

Palestinian witnesses said helicopters fired three missiles at the building setting it ablaze.

At least three helicopters were seen flying over the north-eastern part of the city for 15 minutes.

The Israeli army confirmed the raid, saying it was aimed against Palestinian militants.

"The Israeli armed forces will continue to damage and destroy the terror infrastructure in the Gaza Strip, wherever hostile terrorist activity is being carried out against Israeli citizens," it said in a statement.

But the owner of the Gaza City building, Walid Dahshan, told the BBC's Barbara Plett that the workshop was used to repair car engines.

He said that Israel's claim that it was a factory used to produce weapons was totally ridiculous.

Mr Dahshan, said he was sitting outside his store with friends when the missiles struck.

"We saw big flame coming and explosion that shook all the area and I fell out of chair," the Associated Press news agency quoted him as saying.

It was the first Israeli attack on Gaza City since an Israeli F-16 fighter plane dropped a one-ton bomb on a building there last month, killing Salah Shehada, a leader of the militant Palestinian group Hamas, and 14 other people.

Blockade tightened

Announcing a freeze on Palestinian movement, Mr Ben-Eliezer said the army was "imposing a total blockade of the West Bank - nobody enters and nobody leaves".

Palestinians say Israel is keen on destroying their economy

Movement will be completely restricted - with the exception of medical and humanitarian cases - in the towns of Jenin, Nablus, Tulkarm, Qalqilya and Ramallah.

The army added it would cordon off the town of Rafah, a frequent flashpoint of violence, to isolate it from the rest of the Gaza Strip.

The defence minister imposed the new conditions hours after Palestinian gunmen shot dead an Israeli couple in their car as they drove on a road north of the West Bank city of Ramallah.

Two of their children were also wounded in the attack.

Continuing violence

Hours after the restrictions came into effect, a suspected would-be Palestinian suicide bomber blew himself up prematurely in a car near the northern Israeli town of Umm al-Fahm, Israeli police said.

Regional police chief Dov Loski said "a huge disaster was averted" before the suspected bomber could reach his intended target.

As Israel tightened its control on the West Bank, a teenage Palestinian boy was killed by Israeli tank fire after breaking a curfew in Nablus on Monday night, Palestinian sources said.

Earlier, the Israeli army arrested Hamas' northern West Bank commander, Mazen Fukha, in a raid on the Palestinian city of Jenin.

Israel said Mr Fukha had supplied explosives used by a suicide bomber who blew himself up on a bus in northern Israel on Sunday, killing nine passengers as well as himself.

Israeli troops also killed two Palestinian militants in a raid on a house in the village of Burka, near Nablus, Palestinian sources said.