Two Palestinians killed in air strike

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Two Palestinians were killed and 20 critically injured when an Israeli F-16 jet dropped a large bomb on a building in a residential area of the Gaza Strip as part of the most ferocious air assault by Israel since the start of the intifada 14 months ago.

The bombardment, on a Palestinian security service building, was one of at least eight attacks by Israeli armed forces in the aftermath of the Hamas suicide bombings that killed 25 Israelis at the weekend. Israeli officials have said the campaign, which it bills as a "war on terror" akin to that waged by the US since 11 September, will escalate until Yasser Arafat takes effective measures against militant Palestinian nationalists, particularly the Islamic groups.

America, Israel's closest ally, delivered a victory to the Prime Minister, Ariel Sharon, by confirming that it has broadened its war on the al-Qa'ida network and now more than ever brackets radical Islamic Palestinian militants in the "terrorist category", despite their widespread grassroots support in the occupied territories .

The US President, George Bush, has frozen the assets of three groups which America claims are linked to Hamas. They were the Holy Land Foundation for Relief and Development, a Texas-based charity whose offices were raided by the FBI, and the Al Aqsa Bank and Beit el-Mal Holdings Company on the West Bank. Announcing the move, Mr Bush said: "The message is this: Those who who do business with terror will do no business with the United States."

Making his first public comments since the crisis erupted, Mr Arafat told CNN that Mr Sharon's conduct indicated he did not want the Middle East peace process to resume. There was particular anger among Palestinians that Israel was bombing the same security forces it was pressing to round up militants. Yasser Abed Rabbo, the Information Minister, said: "How can we do this when are buildings are being bombed? There is no place for the police to assemble, nowhere for them to interrogate anyone."

Among the targets was a police post 50 yards from the office in which Mr Arafat is now bottled up in the West Bank town of Ramallah. Two people were injured when it was hit by missiles fired from helicopters in an assault which Israel said was meant as a message to the Palestinian leader.

Israel's assaults on the Palestinian Authority, which it called a "terror-supporting entity", provoked new tensions in Mr Sharon's coalition government and prompted Labour ministers led by the Foreign Minister, Shimon Peres, to walk out of a cabinet meeting. "I know there are many members of my party who think the time has come to leave the government," Mr Peres said. However, with the Israeli public leaning towards the right, Mr Peres would gain little by leaving government.

Although the US has stood firmly behind Israel's latest moves, behind the scenes it is urging restraint. But there was no word of condemnation from any Western governments about Israel's use of F-16 jets to bomb Palestinian areas.