US warns of Palestinian sanctions

Arafat is under both diplomatic and military pressure

President George W Bush has warned the Palestinians that the United States will cut off investment if they fail to heed his calls for change.

If there's leadership compromised by terror, we won't be along the path to peace. I've got confidence in the Palestinians when they understand fully what we're saying

George W Bush

"The status quo is quite simply unacceptable," Mr Bush told a news conference at the G8 summit in Canada.

Repeating a theme from his policy speech on the Middle East earlier in the week, the president called for the Palestinians to elect a new leadership "not compromised by terror".

Mr Bush was speaking after the Palestinians announced that presidential and parliamentary elections were to be held between 10 and 20 January of next year.

Aid threat

The Palestinians must reform their institutions, constitution and security and financial services, Mr Bush said at the conference held jointly with UK Prime Minister Tony Blair.

He said the US should not put money into "a society which is not transparent" but "corrupt", adding: "I suspect other countries won't either".

The US wants to see Arafat removed

"The road map I've laid out is one that calls upon all our friends and allies to join and bind together against terror," he said.

Asked what his policy would be if Mr Arafat was re-elected, Mr Bush said: "If there's leadership compromised by terror, we won't be along the path to peace. I've got confidence in the Palestinians when they understand fully what we're saying, that they'll make right decisions as to how we get down the road for peace."

Correspondents say that while the US does not provide any direct assistance to the Palestinian Authority, it does channel funds to it through the United Nations and non-government organisations.

Mr Blair also urged Palestinians to elect a leader who is "serious about peace and resists and totally rejects terrorism".

"It's for the Palestinians to elect the people that they choose to elect," he said. "But it's for us to say the consequences of electing people who aren't serious negotiating partners is that we can't move this forward."

Election date

Saeb Erekat, the aide to Mr Arafat who announced the Palestinian elections on Wednesday, denied the timing was linked to Mr Bush's Middle East speech.

But in an apparent reference to the call for Mr Arafat's replacement, he said that Palestinians would not wait for their leaders "to be parachuted in from Washington or elsewhere".

A report by one of Mr Arafat's top officials, Nabil Shaath, that the veteran leader would stand for election again himself was quickly dismissed as premature by a colleague.

"This is absurd, absurd - talking about swimming before you have a pool or water," said Information Minister Yasser Abed Rabbo.

Hebron siege

Israel has continued its security operation in the West Bank, maintaining a siege of a Palestinian security facility in Hebron for the second day running.

Israeli radio says 20 wanted militants are inside the Hebron facility, along with 130 other Palestinians.

Troops, the radio says, are preparing to storm the building which has been under fire from tanks and has had its entrance demolished by an army bulldozer.

Four Palestinian policemen were killed when Israeli troops first moved in on Tuesday.

With the exception of Jericho, Israel now controls all the main towns in the West Bank as a result of operations launched after suicide attacks on Jerusalem killed 26 Israelis.