Hamas's Gaza-based political leaders, including Mr Haniyeh, had already gone into hiding.

But last night's direct threat to kill Mr Haniyeh, a democratically elected head of state, sharply raised the stakes.

The bid to free Corporal Shalit was brokered by Egyptian President Hosni Mubarak, who last night warned Hamas it faced severe consequences if it did not curb its "extreme stance" and described the growing conflict as a lightning rod for Palestinian vengeance.

Jerusalem has made no official comment, but Egyptian state media said Israel had found the offer unacceptable. Israel has not spelt out the terms demanded by Hamas, but earlier this week it refused to buy into talk of a prisoner swap.

Thousands of Hamas supporters protested in Gaza City late on Thursday over the arrest by Israeli forces of up to 32 Hamas MPs on the West Bank that day.

A Hamas spokesman said the group would never recognise Israel, in spite of a deal its leaders signed this week offering implicit recognition of the Jewish state in return for easing an economic blockade.

Israeli fighter jets bombed 20 targets in Gaza, including the Interior Ministry, which it said had been used by militants to stage meetings, while artillery hit the northern strip with 500 shells in the 24 hours until yesterday morning.

Jewish settler Eliyahu Asheri, who was murdered by militants this week, was buried on Thursday as leaders of the Popular Resistance Committees pledged to seize more hostages in the West Bank. No further word has emerged about another suspected Jewish hostage, Noach Moskowitz, who Israeli police said was found dead hours after Mr Asheri's remains were found.

Much of Gaza, including two main hospitals, was without power and running water as a UN aid chief warned that the 1.4 million residents of the strip were three days away from a humanitarian crisis.

"They are heading for the abyss unless they get electricity and fuel restored," said emergency relief co-ordinator Jan Egeland, who urged militants to free Corporal Shalit and stop firing rockets into Israel.

Residents complain that sonic booms caused by Israeli jets traumatise children and that shelling confines families to their homes.

Israeli Prime Minister Ehud Olmert has vowed the military will do all it can to avoid civilian deaths if a full-scale assault is launched.

Mr Olmert said the decision to invade northern Gaza had already been delayed to allow Mr Mubarak's negotiations to continue.

The arrested Hamas legislators have been sent to security prisons and many will stand trial on terrorism offences. The detentions have hurt Hamas's already limited ability to govern and are likely to force a regime change.

Israel claims it has intelligence about the area where Corporal Shalit is held, but has been unable to pinpoint the exact location. Mr Olmert said the military would leave the strip if he was unconditionally and safely returned.

Egypt and the neighbouring Arab states of Jordan and Lebanon fear a war between Israel and the Palestinians could lead to uprisings within their own borders, which house many Palestinian refugees.

Late last week, Olmert called off plans to broaden the Israeli incursion from southern Gaza to the coastal strip's north in a nod to the diplomatic activity.

On Sunday, he hinted at possible escalation when he said his government had instructed the military to "do all it can" to return Shalit safely.

Palestinians said two missiles fired by attack helicopters set Haniyeh's office ablaze, but it was empty because of the late hour, witnesses said. One bystander was slightly injured.

Inspecting the wreckage, Haniyeh called the attack senseless. "They have targeted a symbol for the Palestinian people," he said.

The Israeli military said, however, it would "employ all means at its disposal ... to secure the safe return" of Shalit. Roni Bar-On, an Israeli Cabinet minister, said the attack was also meant to "compromise the Hamas government's ability to rule."

"We will strike and will continue to strike at (Hamas') institutions," he said. "They have to understand that we will not continue to let them run amok."

Hamas, whose charter calls for Israel's destruction, took power after winning Palestinian parliamentary elections in January.

Although Israel has said repeatedly in the past that Haniyeh could be a target for assassination, the gunmen holding Shalit are thought to take their orders from Hamas'
Syria-based political chief, Khaled Mashaal, so the attack on Haniyeh's office appeared to be more symbolic than aimed at killing him.

In other airstrikes after midnight, Israeli aircraft hit a school in Gaza City and Hamas facilities in northern Gaza, where a Hamas militant was killed and another wounded, Palestinian officials said. The military said the two were "planning terror attacks against Israel."

The 34-year-old Hamas gunman, Shaaban Manoun, was the second militant killed in the offensive.

Exerting pressure on Hamas from various directions, Israel continued to hold 64 Hamas leaders, including eight Cabinet ministers, rounded up in the West Bank on Thursday. Military officials said the government would bring the detainees to court by midweek to seek permission to extend their detention.

After the Israeli airstrike on his office, Haniyeh met with Palestinian President Mahmoud Abbas for an hour to discuss the Israeli attacks and efforts to keep the government functioning despite the arrests, the prime minister's office said.

In a statement, Haniyeh called for foreign intervention to stop the Israeli offensive. "The international community must shoulder its responsibility," he said.

Israel, meanwhile, planned to reopen its main cargo crossing with Gaza later Sunday to allow food and medical supplies to reach the impoverished strip, the Defense Ministry said. The Karni passage, sealed after the militant attack, will be open four days this week, the ministry said.

While food shortages have not been reported, human rights groups have cautioned that Gaza could face a humanitarian crisis because nearly half the territory's electricity supply was knocked out after Israeli missiles struck Gaza's only power station. Israel has since increased its supply of electricity to Gaza, the Israeli army said Saturday.

Fuel supplies were also dwindling after Israel cut off the flow to Gaza through a pipeline. Israel Radio reported that a separate crossing in southern Israel would be opened later Sunday to allow fuel through, but the Defense Ministry did not confirm this.

On Saturday, Hamas demanded the release of more than 1,000 prisoners held by Israel and a halt to the offensive, but Israel rejected the conditions out of hand. On Sunday, Bar-On reiterated that Israel wouldn't negotiate Shalit's release.

Hamas government spokesman Ghazi Hamad urged Israel to be more flexible.

"I think that if the Israeli government will understand that it's possible to release prisoners, things will end OK," Hamad told Army Radio. "If not, I think the situation will be very difficult for us and for you, too. ... Maybe there will be a (military) escalation and people will die."

Peretz met with senior security officials Saturday night and then called U.S. Secretary of State Condoleezza Rice to urge the Bush administration to step up pressure on Syria to work for Shalit's release, Israeli officials said on condition of anonymity because they were not authorized to make a formal statement.

Prime Minister Recep Tayyip Erdogan of Turkey, a predominantly Muslim country that has close ties with Israel, called President Bush on Saturday and talked for 30 minutes about the crisis.

"The president said that the initial goal should be freeing the Israeli soldier - that is the key to ending the crisis," said Frederick Jones, spokesman for the National Security Council at the White House.

However, political and security officials said that Israeli military and political leaders have not ruled out swapping 19-year-old Shalit for Palestinian prisoners who weren't involved in hostile activity against Israel, though they didn't think a deal was near. The officials spoke on condition of anonymity because they were discussing private conversations.

Publicly, Israel has refused to discuss the captive with Palestinian militants and rejected their demand to release some of the 9,000 Palestinian prisoners held in Israeli jails.

Israeli aircraft went back into action early Monday, hitting several targets around the Gaza Strip including a building in Gaza City where the Al Aqsa Martyrs' Brigades has an office, Palestinians and the military said. Al Aqsa is a violent offshoot of moderate Palestinian President Mahmoud Abbas' Fatah movement.

A missile struck the second floor of the two-story building, setting it on fire. No one was in the office at the time of the attack, after midnight. A family living on the first floor escaped harm. Other areas hit in the airstrikes included a building in northern Gaza and empty fields.

Israel also shelled northern Gaza early Monday, slightly wounding one person in a house on the outskirts of the town of Beit Hanoun, Palestinians said. The military confirmed artillery was fired in the area.

Shelling from the sea, Israeli navy ships aimed at a beachfront Hamas camp but missed, Palestinian security officials said.

Israeli aircraft, gunboats and artillery have pounded Gaza since troops and tanks took up positions in the south of the coastal strip on Wednesday. The operation is aimed at pressuring Palestinians to free Shalit. Five Palestinian fighters had been reported killed, four of them on Sunday.

Israel has been massing forces across from Beit Hanoun in northern Gaza. Olmert called off a planned invasion late last week, but there were signs that the military was ready to roll again.

Hamas-affiliated militants holding Shalit have offered to give Israel information about him in exchange for the release of hundreds of prisoners in Israeli jails, a deal Israel rejects.

"These are difficult days for Israel, but we have no intention of giving in to any form of blackmailing," Olmert said Sunday. "Everyone understands that giving in to terror today means an invitation to the next act of terrorism, and we will not act that way."

Secretary of State Condoleezza Rice called Olmert Sunday to discuss the situation, Olmert's office said in a statement. He told Rice Israel would use all means at its disposal to get Shalit released and said there was no humanitarian crisis in Gaza.

Palestinian officials had warned Saturday that a shortage of fuel threatened to shut down generators used to pump water and power hospitals.

Israel reopened the main cargo crossing with Gaza to allow 50 trucks of food, medical supplies and fuel into Gaza from Israel, Israeli officials said. Trucks carrying diesel fuel, gasoline and natural gas also began entering northeastern Gaza through the Nahal Oz border crossing.

"I take personal responsibility for what is happening in Gaza. I want nobody to sleep at night in Gaza. I want them to know what its like," Olmert told his Cabinet. "People are saying it's uncomfortable. It will be uncomfortable, (but) nobody dies from being uncomfortable."

Olmert told the Cabinet he had instructed the military to "do all it can" to get Shalit back safely, but added that the offensive would end immediately if he was released, according to a meeting participant who spoke on condition of anonymity.

Last week, Israel arrested eight Cabinet ministers in the Hamas-led Palestinian government and dozens of other Hamas lawmakers in the West Bank.

Olmert indicated to the Cabinet that more such arrests may be coming in Gaza, Hamas' power base where many of its leaders including Prime Minister Ismail Haniyeh, live.

Egypt has been working to broker a compromise to free the soldier and end the standoff, but negotiations were complicated by confusion over who was in charge of Shalit's fate.

The Palestinian government, led by the Islamic militants of Hamas since January elections, said it had no contact with the kidnappers. Israel assumes Shalit's captors answer to Hamas leader Khaled Mashaal, who lives in Syria, but the group's foreign leadership denied having any authority over the matter.

"We have no contact with those holding the prisoner," said Osama Hamdan, a top Hamas leader based in Lebanon.

Egyptian President Hosni Mubarak was trying to enlist Syrian President Bashar Assad's help to persuade Hamas leaders to free Shalit, while Egypt's intelligence chief was talking with Mashaal directly, an Egyptian official said. But Israeli Vice Premier Shimon Peres said Sunday that Syria has not acted to help free the soldier.

Raising the stakes, Israeli aircraft launched two missiles into the Palestinian prime minister's empty office building before dawn Sunday, damaging offices and leaving parts of the building smoldering.

Abbas, a rival of Haniyeh's from the moderate Fatah Party, surveyed the damage with Haniyeh and called the attack "a dirty, criminal act."

The strike, which came after Israel destroyed the interior minister's office, was a clear signal no one was immune.

"I remain very concerned about the need to preserve Palestinian institutions and infrastructure," U.N. Secretary-General Kofi Annan said Sunday. "They will be the basis for an eventual two-state solution and are thus in the interests of both Israel and the Palestinians. It would therefore seem inadvisable to carry out actions that will have the opposite effect."

Hamas militants said they would retaliate if Israel continued attacking Palestinian institutions. Hamas is responsible for dozens of deadly suicide bombings in Israel.

An airstrike Sunday hit a school in Gaza City and Hamas facilities in northern Gaza, where a Hamas militant became the second Palestinian fatality since the offensive started, Palestinian officials said. The Israeli military said the militant was "planning terror attacks against Israel."

In other violence Sunday, Israeli artillery pounded open areas near the southern town of Khan Younis. Israeli troops shot dead three armed Palestinians near the long-closed Gaza airport, two of them carrying explosive belts, the military said.

Israel also shut down deliveries of fuel. On Saturday there were long queues for petrol but by yesterday the pumps had dried up and garages were closed. There is also a dire shortage of diesel for generators.

In the summer heat and without power for fans, the Najar family spend the nights outside in the cool air, at least until the early hours, when Israeli jets rouse Gaza's population with sonic booms.

The planes break the sound barrier over Gaza, creating waves of pressure and noise that in the first instance are hardly distinguishable from a real and massive explosion. The sound bomb appears to be very close by no matter where a person is. The booms are powerful enough to blow out windows.

"The sonic booms are terrible for the children," said Mrs Hor. "They wake up and scream and come running out of their room. We adults get used to it because although it is very loud and shocking we know it is not a bomb. But the children are frightened every time."

An Israeli MP said yesterday that the prime minister, Ehud Olmert, had told the military to "make sure no one sleeps in Gaza at night".

They have been storing their rationed supplies in two blue 250- litre barrels, saving most of it for drinking and - when it is possible - for cooking. And to escape the heat, he says, members of the family have started sleeping on mattresses on the pavement outside the house. The latest crisis has compounded the problems of the Mughari family ever since Hamas provoked an international economic blockade of the Palestinian Authority by winning last January's election.

Mr Mughari, one of only two brothers working - the other three are unemployed tailors - has not received the £134-per-month salary for three months from the job creation scheme on which he works. While the family are eligible for UN food aid, he says their meat consumption has fallen from three or four times a week to once a fortnight.

The family is also coming to terms with the resumption of the deliberate sonic booms, or "bombs", generated by Israeli F-16s overflying Gaza, starting in the predawn hours. "The children wake up screaming and run into my room," he says. "Some of them understand that this is just a very loud noise, but Mai, my four-year-old daughter thinks it is a real bombardment. I am worried that it will affect them psychologically in the future."

If the purpose of Israel's military campaign so far is to secure a major shift in Palestinian public opinion, it does not appear to have worked. Flanked by his parents and many of his own and his brothers' children, Mr Mughari says that even if there is an Israeli ground incursion: "We'll take it even if it gets worse."

There are few overt signs of preparations by militants, but Mr Mughari adds: "If [the Israelis] come here they will not get roses. There will be resistance." He adds of Cpl Shalit's abduction: "My personal opinion is that there should be a prison exchange."

Ahmadinejad is in Gambia to address the African Union summit.

Tehran is under mounting pressure to respond to an international offer that would defuse the nuclear standoff.

World powers gave Iran one more week on Thursday, to provide a "clear and substantive response" to an international proposal on suspending uranium enrichment.

Tehran has rejected the deadline.

Iran will reply to proposal in August

Foreign ministers of the G8 group of leading nations said European Union foreign policy chief Javier Solana and Iran's head nuclear negotiator, Ali Larijani, would meet to discuss the plan on Wednesday.

"We expect to hear a clear and substantive Iranian response to these proposals at the planned meeting," said the ministers in a statement from Moscow, where they were preparing a July 15 to 17 summit in Saint Petersburg.

But speaking at the United Nations in New York, Iranian foreign minister Manouchehr Mottaki said Tehran would not respond before late August.

Solana handed Iran the proposal from the five permanent UN security council members - Britain, China, France, Russia and the United States - as well as Germany, on June 6.

The proposal promises incentives and multilateral talks if Iran agrees to temporarily halt uranium enrichment.

Diplomats said Iran was asked to reply by June 29. Last week, Ahmadinejad said Tehran would take until August 22 to answer.

Iran said its nuclear programme was to generate electricity and that uranium enrichment was needed to provide the fuel.

The EU and the US suspect Iran of concealing a military weapons project.

The FBI's most important connection during this period was with First Data, an Omaha-based electronic fund transfer company with a global reach. The company offered to assist the U.S. government in the war against terror.

FBI Financial Crimes Section chief Dennis Lormel and his colleagues at other intelligence agencies eventually realized that the information supplied by the company could be used not only to locate and freeze the assets of terror groups, but also to track them in real time - in other words, to follow the money trail directly to the sources and destinations of the funds.

First Data subsidiary Western Union, with branches throughout the Arab world and a high volume of money transfers, was in a perfect position to help. American intelligence agents and company officials cooperated in tracking the data trail and in monitoring security cameras installed in Western Union branches in order to see who was picking up the funds.

According to the book, then Shin Bet head Avi Dichter, whom Suskind calls an agent of change in the U.S. war against terror, was briefed by Lormel on the new monitoring capabilities during one of his frequent visits to Washington.

In April 2003, Dichter called Lormel to ask for the FBI's help in this regard. Dichter told officials that the Shin Bet had information about a courier who was expected to be bringing money to Israel from Lebanon shortly. The source of the money was known, but not the identity of the person for whom its was destined.

In early April, 2003, an Islamic Jihad activist went to a Western Union office in Lebanon and ordered a money transfer to Hebron. The Justice Department authorized Western Union to release this information to the FBI and the CIA, and eventually to the Shin Bet. According to Suskind, all this took just minutes, enabling Israeli intelligence to track the person who collected the transfer in Hebron and to uncover the terror cell.

According to the book, this method was used successfully many times over the next year and a half, until autumn 2004, when Palestinian operatives realized that their Western Union transfers were being used to trap them.

Dichter told Haaretz on Wednesday that he has never spoken with Suskind.

Intelligence cooperation between the U.S. and Israel has increased over the past several years, but until now, Israel's use of information from American companies had been kept secret.

The Homeland Security Committee of the U.S. House of Representatives approved a bill last week aimed at further increasing intelligence ties with Israel and other countries by establishing a new office for international cooperation programs within the Department of Homeland Security.

This atmosphere of cooperation, Suskind states in his book, has reinforced the sense that President George Bush wants to assist Israel and was not disturbed by the military operations that Ariel Sharon's government authorized in the territories. Suskind quotes Bush as saying during his first National Security Council meeting that the U.S. must refrain from active mediation in the Israeli-Palestinian conflict.

To then secretary of state Colin Powell's argument that such behavior could be interpreted by Sharon's government as a green light to apply force, Bush responded that sometimes a show of force can clarify the issue at hand.

Police and organisers estimated 600 people attended the protest.

Yishai Menuhin, a spokesman for Yesh Gvul, said: "We call for our government to stop targeting Palestinian civilians - the targeting of civilians is a war crime - and start negotiating with the elected Palestinian leaders, not to arrest them."

Military solution

Aviv Sela, a 19-year-old who has been jailed for refusing to serve in the army, said at the protest: "The military solution is not a solution."

He added that, while not everyone is prepared to go to prison, "everyone has the strength to say no" to the attack on Gaza.

Other demonstrators chanted, "The occupation is terror, the refuser is a hero."

Within Israel, the Gaza invasion is being portrayed as an attempt to release an Israeli hostage, 19-year-old corporal Gilad Shalit.

The soldier was snatched during a raid on Israeli positions outside Gaza last Sunday, in which two Israeli soldiers and two Palestinian attackers were killed.

Prisoner of war

Tamar Gozansky, a former Knesset member, said on Saturday night: "The soldier is not a hostage, he is a prisoner of war. Israel is holding about 7,000 Palestinian prisoners in jail."

Demonstrators believe that the Gaza invasion had little to do with the kidnapped soldier. "It is not self-defence and it is not new - Israel has been dropping artillery shells on Gaza and attacking the population for months," said Zvi Schuldiner, who attended the protest.

"People have been in the army and know the difference between acts of terrorism and this classic and very daring commando act, of fighters against soldiers," said veteran peace activist, Uri Avneri.

Commentators on the left say that the wider Israeli public is critical of the Gaza invasion, not least because there is little trust for the leadership of Olmert and the defence minister, Amir Peretz.

"There is a growing doubt about it, the gap between what the government says and what logic says is getting bigger from day to day," said Avneri.

A recent poll in the newspaper Yediot Aharonot shows 58% in favour of a prisoner swap to release Shalit.

But Saturday night's demonstrators were not hopeful of getting such a message through to the government.

Would the prime minister be paying attention to the demonstration outside his house? "We hear he's really enjoying the world cup," said Menuhin.

The prisoners to be released are those who have not been involved in planning or carrying out "terror attacks", the officials were quoted as saying, adding that those "with blood on their hands" will not be set free.

They also said that the Israeli army would be willing to release Hamas ministers and legislators, as well as security prisoners jailed for relatively minor offenses, according to the report.

The army has formulated a draft deal to gain the release of the 19-year-old Corporal Gilad Shalit who was abducted by Palestinian militants on June 25 after days of discussion among Defense Minister Amir Peretz, Israel Defense Forces Chief of Staff Dan Halutz and top defense brass, said the report.

The draft deal also agrees to stop an ongoing broad military operation in Gaza in exchange for a halt to Palestinian militant rocket firing, attacks on Israeli troops and citizens and abductions, the report added.

The deal, meanwhile, reserves Israel's right to defense itself and to foil attacks by Palestinian militants, it said.

Earlier, Palestinian militants who held Shalit hostage set an early Tuesday ultimatum for Israel to meet their demands to release Palestinian women and minors and 1,000 prisoners in Israeli jails.

The militants also threatened unspecified consequences if Israel failed to do so.

Israel, however, has so far rejected a prisoner swap, insisting on the unconditional release of Shalit.

Israeli troops entered the Gaza Strip on June 28 in a bid to rescue the kidnapped Shalit.

It is the first major Israeli ground offensive in Gaza since Israel quit the desert coastal strip last summer after 38 years of occupation.

Meanwhile, Israeli troops launched a large-scale arrest campaign in the West Bank last week, detaining eight ministers of the Hamas-led Palestinian government and dozens of Hamas lawmakers.

Hamas' armed wing took part in the June 25 attack on an Israeli army post near the Gaza border during which Shalit was snatched.

But the Palestinian government led by Hamas, or the Islamic Resistance Movement, said it did not order the abduction and had no foreknowledge of the attack.

Israel shelled northern Gaza early today, slightly wounding one person in a house on the outskirts of the town of Beit Hanoun, Palestinians said. The military confirmed that artillery was fired in the area.

Israeli aircraft, gunboats and artillery have pounded Gaza since troops and tanks took up positions in the south of the coastal strip Wednesday. The operation is aimed at pressuring Palestinians to free Cpl. Gilad Shalit, the Israeli soldier abducted a week ago. Five Palestinian fighters have been reported killed, four of them Sunday.

Secretary of State Condoleezza Rice called Olmert on Sunday to discuss the situation, Olmert's office said in a statement. He told Rice that Israel would use all means at its disposal to get Shalit released and said there is no humanitarian crisis in Gaza.

Palestinian officials had warned Saturday that a shortage of fuel threatened to shut down generators used to pump water and power hospitals.

Israel reopened the main cargo crossing with Gaza to allow 50 trucks of food, medical supplies and fuel in from Israel, Israeli officials said. Trucks carrying diesel fuel, gasoline and natural gas also began entering northeastern Gaza through the Nahal Oz border crossing.

"I take personal responsibility for what is happening in Gaza. I want nobody to sleep at night in Gaza. I want them to know what it's like," Olmert told his Cabinet. "People are saying it's uncomfortable. It will be uncomfortable, [but] nobody dies from being uncomfortable."

"We give the Zionist enemy until 6:00 tomorrow morning, Tuesday, July 4," said the declaration, which was posted on the website of the military wing of Hamas, whose political wing leads the Palestinian Authority government.

"If the enemy does not respond to our humanitarian demands mentioned in previous leaflets on the conditions for dealing with the issue of the missing soldier ... we will consider the current file of the soldier to be closed ... and then the enemy must bear all the consequences of the future results," the statement said without specifying what the consequences would be.

'There will be no negotiations': Israeli PM

Israeli Prime Minister Ehud Olmert quickly rejected the ultimatum.

"There will be no negotiations to release prisoners," he said in a statement, which held the ruling Hamas party partly responsible for the return of Cpl. Gilad Shalit.

Shalit, 19, was taken on June 25 when Palestinian militants tunnelled into southern Israel and attacked an Israeli army outpost.

The three militant groups believed to be holding the soldier have demanded the release of about 1,500 Palestinians currently held by Israel.

Israel launched a military campaign in the Gaza Strip in the past week to pressure the militants into releasing the soldier. Air strikes have hit bridges and a power station in the region, which is home to about 1.5 million people.

Israel continues to fire on Gaza

The campaign continued on Monday, as Israeli tanks fired rounds of artillery into northern Gaza.

At least three Palestinian militants were killed. Israeli military officials said two of them were wearing bomb belts.

Early Sunday, Israeli troops gathered across from the border with northern Gaza in what appeared to be preparations for an invasion. On the weekend, Omert vowed his government would do everything it could to secure Shalit's release.

The London-based newspaper Al Hayat reported on Monday that Egyptian negotiators saw Shalit alive and that he was being treated by doctors. The report didn't say when the visit happened.

Gaza, unlike the 1994 West Bank, is supposed to be a semi-autonomous sovereign territory. By bombing its main power station, Israel has deprived most of Gaza of electricity, including water-pumping stations. Sealing off access to water and food can only inflict acute discomfort on the people there; already, frailer Palestinians are dying.

Even more extraordinary were the overnight raids that led to the detention and arrest of eight cabinet members of a sovereign government, including its finance minister, 30 members of parliament and up to another 30 officials. Israel threatens to put some or all on trial for terrorism.

In any other context, this would be a declaration of war.

It is breathtaking, but this is the Middle East. The Hamas government has not yet renounced its commitment to the elimination of Israel or to the use of terrorism. Missiles from Gaza are regularly fired at Israel.

Israeli Prime Minister Ehud Olmert has committed to withdraw Israel from parts of the West Bank, regarded by the Israeli right and Zionist fundamentalists as the ultimate sell-out (even if Israel simultaneously confiscates compensating land). Olmert needed to show that he was no pushover.

But disproportionality on such a scale is self-defeating. It casts Israel as the rogue state and Palestinians as victims. These are not the actions of a government that wants to be a 'partner for peace'.

Worse, it suggests that Israel will find it impossible to accommodate a just settlement.

Every parent, manager and successful politician knows the importance of achieving ends by consent and that entails respect. Subjugation, repression and humiliation do not work as strategies. Yet Israel, overwhelmingly the more powerful player, is governed by an attitude that would not survive days in a family, factory or political party.

Worse, it trashes encouraging developments. Palestinian President Mahmoud Abbas challenged Hamas to recognise that the only way out of the conflict was a two-state solution, in effect, recognising Israel and its gains in the 1967 war, or he would call a national referendum. Hamas backed down, knowing he would win, and reached a national unity pact with Mr Abbas's Fatah. The basis for resuming negotiations was being put in place.

The dark interpretation of Israel's reaction in Gaza is that it does not want a politically viable negotiating partner in Palestine. It suits Israel to characterise Hamas as terrorist fundamentalists who are beyond the pale. Thus it can proceed with its unilaterally imposed settlement, wall and land grab, in turn fanning the flames of Palestinian extremism.

We all have a stake in breaking this vicious circle. The best response to the rise of Islamic terrorism would be a just settlement in the Middle East. Israel's actions are linked by a bloody thread to the next terrorist attack on us, now more likely. Britain, with the EU and US, was right to insist that the incoming Hamas government had to recognise Israel and to back that demand with sanctions.

Now that Hamas signals changes, we must be no less uncompromising about condemning Israeli action. The mealy-mouthed reaction of the G8 that we have 'particular concerns' is pathetic. What happened last week was an international disgrace. We need to say so. We hold Hamas to account for its words and actions. The same applies to Israel.