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I have told security forces to take all necessary measures to strike those who hit us
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Israeli Prime Minister Ariel Sharon
Israeli troops and armoured vehicles re-entered Bethlehem on Friday, a day after a suicide attack killed 11 Israelis In Jerusalem.
The bomber, 23-year-old Nael Abu Hilail, came from Bethlehem.
The Israeli soldiers destroyed his home and arrested some of his relatives.
"I have given the orders and told security forces to take all necessary measures to strike those who hit us," Israeli Prime Minister Ariel Sharon said.
Deal off
In Washington, the State Department called on Mr Sharon's government to show restraint.
"We are also urging the Israelis to complete these operations as quickly as possible and to take steps to avoid further civilian casualties," spokesman Philip Reeker said.
Troops surrounded the Dheisheh refugee camp and blocked off Bethlehem's Manger Square and the Church of the Nativity to prevent Palestinian militants seeking refuge there.
Israeli military spokesperson Sharon Feingold told the BBC that militants had set up a "terror infrastructure" in Bethlehem since Israeli troops pulled out in August as part of a confidence-building security agreement.
Israel announced that the deal was off after Thursday's bombing, the deadliest since June.
Friday's incursion leaves the Israelis in control of seven of the eight major West Bank towns.
Proud father
Palestinian security personnel are reported to have evacuated their bases in Bethlehem.
Mr Reeker also urged the Palestinians "to do all they can to end immediately the terror and violence".
The Islamic militant group Hamas has claimed responsibility for the Jerusalem bombing - which also injured more than 50.
The bomber's father, Azmi, told the Associated Press he supported his son's action as a "challenge to the Zionist enemies".
Observers say Prime Minister Ariel Sharon is under intense pressure to take a hard line against Palestinian extremists as he seeks re-election in a January poll.