Israel rejects demands, talks on soldier faltering

Israel yesterday rejected demands from Palestinian militants who abducted an Israeli soldier to free 1,000 prisoners from its jails as Egyptian-led mediation efforts to free the captive appeared to founder.

A Palestinian official said mediators had reported the soldier was alive and stable after being treated for wounds.

But talks aimed at securing Corporal Gilad Shalit's release appeared deadlocked, Palestinian officials said, raising the prospect Israeli leaders might give the green light for a threatened military incursion into northern Gaza.

Israeli troops and gunmen from the governing Hamas movement clashed inside southern Gaza in one of the worst exchanges of fire since the assault to free Shalit began, but there were no immediate reports of casualties.

Shalit's seizure in a raid across Gaza's frontier last Sunday sparked a crisis that has pushed Israeli-Palestinian ties to new lows and dashed any chance peace talks might be revived.

US President George W. Bush said freeing Shalit was key to ending the crisis in Gaza and should be the initial goal, the White House said.

A statement from the militants did not specify that freeing the 1,000 "Palestinian, Arab and Muslim prisoners" and ending Israel's Gaza assault would be in exchange for Shalit's freedom.

But a spokesman for the Hamas armed wing, one of the three groups that captured Shalit, said that was what it meant.

The government of the Hamas Islamists, already straining under a US-led economic embargo to get it to recognise Israel, has said it had no prior knowledge of the militants' raid.

While militants have not said if Shalit was dead or alive, a Palestinian official said mediators had said he was fine.

Israeli tanks entered the southern Gaza Strip this week in the biggest push into the territory since Israel pulled out troops and settlers last year after 38 years of occupation.

Aircraft fired missiles yesterday at training camps and access routes used by militants to fire rockets at Israel.

In the clash in southern Gaza, near the town of Khan Younis, Hamas gunmen said they hit an Israeli tank with two rocket-propelled grenades.

There have been few casualties overall so far.

Diplomats had said Israel wanted to give the Egyptian-led mediation efforts more of a chance before broadening its operations, expected with a push into northern Gaza.

But talks were foundering partly because the militants were insisting on prisoners being freed in return for the 19-year-old tank gunner, the diplomats and Palestinian officials said.