"We are not to be made fools," said Mr Netanyahu who won unanimous backing from his cabinet ministers after they saw television pictures of an attack on an Israeli soldier by a Palestinians.

Earlier, the United States had joined the Palestinians in rejecting new Israeli preconditions for further withdrawals from the West Bank.

Before reaching its decision, the Israeli cabinet had assembled around a TV set and watched a video of Wednesday's attack in which Palestinians threw rocks at the soldier who was trapped in a car in the West Bank town of Ramallah.

The BBC's Jim Muir: "Peace process in deadlock once more"

Mr Netanyahu said the attack was a direct result of statements by the Palestinian Authority against Israel.

"I cannot allow myself to see Israeli citizens being lynched, or about to be lynched, by a crazed mob that received incitement from Palestinian officials," Mr Netanyahu said.

Conditions set out

He said he would only resume once Palestinian leader Yasser Arafat publicly renounced plans to declare an independent state in May, accepted Israel's criteria for the release of Palestinian prisoners and halted all "incitements to violence".

Funeral: Sparked violence

State Department spokesman James Rubin had said Israel was obliged to make the withdrawals under the US-brokered Wye River peace accord saying it "should be implemented as signed."

"We do not think it is appropriate to add new conditions," he said.

Palestinian negotiator Saeb Erekat: "Any new additions not acceptable"

The Palestinians have accused Mr Netanyahu of looking for excuses to derail the peace process.

Middle East Correspondent Jim Muir, who is in Jerusalem, said the TV pictures had a huge impact on the Israeli public and gave Mr Netanyahu the opportunity to draw a line and list his objections.

Clinton's visit

The US warning comes just nine days before a visit by President Bill Clinton to solidify the agreement and just days after Mr Netanyahu told the BBC that the Palestinians had largely complied with the agreement.

US official Alan Miller: "Not appropriate to add new or additional conditions"

Since the attack on the Israeli soldier, settlers have threatened to blockade Ramallah during President Clinton's visit.

Under the land-for-security deal, Israeli troops are to withdraw from 13% of the West Bank in exchange for tougher measures against Palestinian militants.

Tension continues

Meanwhile, tension is still reported to be high between Israeli and Palestinians.

Palestinian shopkeepers in Arab East Jerusalem went on strike and pulled down their shutters, and there were skirmishes and arrests.

The Palestinians are still outraged at the murder early on Wednesday of a father of six who was stabbed to death by a suspected Israeli extremist.