On Monday, three Palestinian militant groups set 6:00 a.m. (0300 GMT) Tuesday as the deadline for Israel to free Palestinian women and minors as well as 1,000 Palestinian, Arab and Muslim prisoners held in Israeli jails for information on the soldier captured in a raid on an Israeli outpost on June 25.

The militants said Israel should bear all consequences if their demands are not met.

Israel promptly rejected the ultimatum, saying it will not hold any negotiation for the release of the soldier.

At predawn Tuesday, Israel continued its air strike operation, sending Apache attack helicopters to fire one air-to-ground rocket at a target at the Islamic University of Gaza.

Osama al-Mezeini, a senior Hamas official in Gaza, said that the reason why the militants decided to halt talks with mediators "is that Israel still rejects the militants' demands and continues its offensive against the Gaza Strip.

Israel rejected an ultimatum issued by Palestinian militants holding Cpl. Gilad Shalit to free Palestinian prisoners in Israeli jails before 6:00 a.m. (0300 GMT) on Tuesday.

Shalit was captured by Palestinian militants in an attack against an Israeli army position southeast of Gaza-Israel border on June 25.

In response to the deadly attack, Israeli troops launched an operation dubbed "Summer Rains" against the Gaza Strip in a bid to rescue the kidnapped soldier.

Three Palestinian factions, among them the Hamas armed wing, pulled out of negotiations with Egyptian mediators trying to end the standoff over Shalit, a Hamas political leader said.

Israel rejected a 6 a.m. (0300 GMT) ultimatum set by the factions, which demanded that the Jewish state free 1,000 prisoners. Unless the demands were met, the factions said, "the enemy will bear full responsibility for future consequences."

Olmert said Israel would not negotiate with the militants, and the Maariv newspaper reported the government had given the army a green light to launch a deeper incursion into northern Gaza, though there was no indication when it might begin.

"This is a long war," Olmert said. "It requires lots of patience, sometimes endless restraint. We have to know when to clench our teeth and to deal a decisive blow."

Washington has been urging Olmert to show restraint and take steps to minimize civilian casualties.

Hamas accused Israel of trying to topple its three-month-old government, which the Jewish state and Western powers have pushed to the brink of financial collapse by cutting off aid.

The smallest of the three militant groups, the previously unknown Islamic Army, said there would be no further information released on 19-year-old Shalit, who was seized in a cross-border raid on June 25.

They sent conflicting signals about his fate.

"Whether he will be killed or not killed, we will not disclose any information ... Discussion is closed," said Islamic Army spokesman Abu al-Muthana.

But he later said: "We do not kill captives. Our Islam requires that we treat captives well and fairly." He declined to say whether Shalit was alive or dead.

Osama al-Muzaini, a Hamas political leader, said the militant groups have withdrawn their representatives from the talks with the Egyptian mediators.

He compared the fate of Shalit to that of Israeli airman Ron Arad, who has been missing since bailing out of his plane over southern Lebanon 20 years ago. There has been growing speculation Arad is dead.

"They (the militant factions) may kill him (Shalit), take him to another country or may hide him. All options are open," al-Muzaini said.

ISRAELI BUILD-UP

Palestinian security sources said Israel had increased the number of armored vehicles on the northern edge of the strip, which Israel quit last year.

A small Israeli force moved deeper into northern Gaza in search of explosives and tunnels but the army said it was not part of a broader incursion. Overnight, an Israeli air strike in northern Gaza killed one militant.

Israel has hinted it could assassinate leaders of Hamas, whose government is under an international aid embargo, if Shalit is not freed. "I want to stress, none of them will be immune," Olmert said.

Interior Minister Roni Bar-On told Israel Radio: "Hamas well understands ... that the sky will fall on them if they harm Gilad Shalit."

Hamas, which advocates Israel's destruction, does not want to lose face by freeing Shalit without getting something in return. Israel says it does not want to set a precedent that could lead to more abductions.

Hamas sources said Western diplomats, whom they did not name, had told the group that Israel had prepared a 13-man hit list headed by exiled leader Khaled Meshaal and including Prime Minister Ismail Haniyeh and Foreign Minister Mahmoud al-Zahar.

Israeli security sources said a commando raid to try to rescue Shalit remained an option but would be risky in Gaza's maze of alleyways. The last Israeli soldier abducted by Palestinians was killed in a failed rescue bid in 1994.

Israel has threatened to kill Hamas leaders based in Damascus and repeatedly demanded Syria take responsibility for sheltering Palestinian militants in the wake of the June 25 capture of its soldier on the Gaza border.

The crisis threatened to boil over on Tuesday, as a deadline set by the soldier's Palestinian captors passed and Egyptian-led mediation appeared to have fallen flat as Israel again rejected any talks with "terrorists".

"We do not negotiate with terrorists. We act with all the necessary force but we do not give in to blackmail," Olmert said.

"We will not let anyone believe that the kidnapping is a means of sending Israel to its knees. If we give in today, numerous civilians will be the target of kidnappings because we will be sending a message that these methods pay."

On Monday, Defense Minister Amir Peretz warned Syrian President Bashar al-Assad that "all the responsibility falls on him".

His words were echoed by Foreign Minister Tzipi Livni, who said after talks in Moscow that "Syria, which protects (Hamas) and grants asylum to its chiefs must understand that it can not escape responsibility for that."

Olmert has called for Syria to expel Palestinian militant leaders.

"The key to resolving the crisis is in Damascus since the directives and orders for terrorist actions originate there," he said earlier this week in a telephone conversation with US Secretary of State Condoleezza Rice.

"The Syrian leadership must dismantle the terrorist organization command centres located in its territory," he added.

Home to exiled Hamas political supremo Khaled Meshaal, Damascus has shrugged off a stream of Israeli and US accusations as well as an Israeli jet flyover of a Syrian presidential palace last week.

Assad on Monday pledged support for the Palestinians amid "Israel's aggressive stand and its unjust accusations", but made no attempt to enter the fray over the captured soldier.

UN Secretary General Kofi Annan telephoned Assad to discuss the mounting crisis, and Turkey sent a special envoy to meet with the Syrian leader in a bid to defuse the situation.

"What we are trying to do is to contribute to efforts to prevent further escalation in this problem," Turkish Foreign Minister Abdullah Gul told reporters on Tuesday.

Before sending the envoy to Damascus, Prime Minister Recep Tayyip Erdogan spoke over the telephone with US President George W. Bush, Annan and Israeli and Palestinian leaders, Gul said.

According to the Israeli daily Maariv, Egyptian and Palestinian mediators are "furious with the Syrians in general over their behavior, and with President Bashar al-Assad in particular," for Damascus's refusal to help.

The current crisis was sparked after Palestinian militants tunneled under the Gaza border and raided an Israeli army post, snatching one soldier and killing two more. Two Palestinian fighters were also killed in the shootout.

One of the three groups which claimed responsibility for the snatching of 19-year-old soldier was the armed wing of Hamas, whose politicians scored a sweeping victory in Palestinian legislative elections in January.

In response, Israel has launched a massive military incursion into Gaza, moving in troops for the first time since leaving the territory last year after a 38-year occupation.

Israel sent ground forces into Gaza and knocked out a power station on June 28 on the first of seven straight nights of air strikes over the impoverished territory.

De Soto warned of the risk of water-born diseases without proper water distribution, sanitation and sewage system, and he urged Israel to restore fuel supplies and "cooperate energetically" to get the transformers replaced.

"We don't want to suggest that this is like Darfur... It's a dangerous situation, it's a situation that could get very serious over time," he said.

De Soto also said the United Nations "took exception" to Israel's arrest of a third of the Hamas-led Palestinian government and the bombings of the Gaza offices of Ismail Haniya, the prime minister, last week.

"Palestinian institutions which have functioned and we have relied on very heavily in order to provide for the basic needs of the Palestinian people need to be preserved if there is going to be a two-state solution," he said.

At least 15 armoured vehicles and two bulldozers surrounded the police station in the West Bank town.

Troops demanded over loudspeakers that police give up the suspects.

The army fired shots at the building when the suspects did not immediately give themselves up, security sources said.

An Israeli army spokesman said soldiers had encircled a building in which "the murderer of Eliahu Asheri is hiding".

The body of Asheri, an 18-year-old Jewish settler abducted by Palestinian fighters, was found dumped in the West Bank on Thursday, adding to tensions in the worst crisis between Israel and the Palestinians since Hamas took office in March.

The Popular Resistance Committees, a group which has also jointly claimed the capture of an Israeli soldier, said it killed the abducted settler.

Israeli air strikes

Early on Tuesday, an Israeli aircraft fired a missile into the northern Gaza Strip , killing one person and wounding two, Palestinian security sources said.

The army said it had fired at militants who were laying explosive devices in an area close to Israeli forces.

Israel aircraft also fired missiles at an Islamic University building in Gaza city. The university is considered a Hamas stronghold.

The building, where the Hamas-dominated student council meets, was heavily damaged.

Israel has been building up forces at the northern edge of the Gaza Strip for a possible extension of an offensive following the soldier's capture.

Israeli soldiers also carried out a raid on a Hamas office in Nablus late on Monday.