US puts funding pressure on Arafat

US aid depends on Arafat halting attacks immediately

US Secretary of State Colin Powell has begun a final meeting with Palestinian leader Yasser Arafat as he wraps up his Middle East peace mission, with no sign that it will bring a ceasefire.

Palestinian officials say there will be no deal or truce until Israel makes a full withdrawal from all the West Bank areas it has occupied.

Aid to Israel and Palestinians in 2001

Israel: $2.4bn military aid, plus $200m grants and $700-800m 'general' aid from US

Palestinians: $570m aid from Arab League, $300m from European Union and $240m from US

Source:World Bank

But Washington has called on the Palestinians to halt "terrorism" immediately or risk losing millions of dollars in aid.

Mr Powell met Mr Arafat at the Palestinian leader's shell-blasted Ramallah headquarters, surrounded by Israeli sharpshooters.

As the talks began one of Mr Arafat's top aides, Saeb Erekat, warned that the situation was worse than a week ago, with the Israelis "deepening the reoccupation". "I don't know if we have a Palestinian Authority any more," he said.

'Close watch'

Since 1994 US presidents have signed a waiver every six months that allows the Palestine Liberation Organisation to lobby and finance itself in Washington. But the annual $75m in aid will now be conditional on Mr Arafat halting attacks on Israelis.

New conditions for aid to Palestinians

Ceasefire in Middle East

Resumption of security cooperation with Israel

Clamp down on militants

The Bush administration said it would be watching Palestinian compliance "very closely".

After a final round of talks with the US secretary of state on Tuesday, Israeli Prime Minister Ariel Sharon indicated that he might drop objections to Mr Arafat attending an international Middle East peace conference.

Speaking on Israeli television, Mr Sharon said a Middle East summit involving Mr Arafat could take place in the United States in June.

Powell 'progress'

Mr Powell said he was "making progress" on his mission, but was unlikely to produce a ceasefire by the end of his trip.

Israel receives $3bn a year - much of it in military grants

Palestinian and US negotiators are reported to be working on a joint statement condemning suicide bombings and endorsing the creation of a Palestinian state, but falling short of declaring a truce.

Mr Sharon has previously insisted that Mr Arafat, whom he accuses of fostering terrorism, should not attend any peace talks.

But the prime minister told Israeli television on Tuesday that whoever represents the Palestinians at a summit was "a secondary issue".

Mr Sharon has pledged to pull troops out of Jenin and Nablus within a week. But they will stay in Bethlehem and Ramallah until Palestinian "terrorists" there surrender, he said.

New incursion

Israeli forces moved into a Palestinian district of Jerusalem overnight. Residents of Issawiyah said troops removed people from their homes and made arrests.

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As diplomatic moves continued, the militant group Hamas appealed for funds to buy the weapons needed for suicide bombings and attacks against Israelis.

The website of the group's military wing launched the appeal, imploring Arab supporters to consider the cost of modern guerrilla actions.

The group claims its fighters have killed 65% of Israelis who have died since the current Palestinian uprising began 18 months ago.

A Palestinian man was killed and two others were reportedly injured trying to infiltrate a Jewish settlement in the Gaza Strip on Tuesday night.

The BBC's Caroline Hawley in Bethlehem reported the heaviest exchange of fire on Tuesday night between Israeli troops and Palestinian gunmen in the Church of the Nativity since a stand-off began two weeks ago.

She said a bell tower had been hit and smoke was rising in Manger Square.