HIGHLIGHTS: Ben-Eliezer: Labor Must Remain in Government||Sharon Claims to be Working on a Peace Initiative||Arafat Distances Himself From a Fatah Statement Calling for Boycotting Israeli & American Negotiators||Israel Arrest 4 Resistance Leaders and Dozens Others in the West Bank & Gaza||Palestinian Street Anger Tilting Against PA But Not Against Arafat|| STORY: Israel's center-left Labour Party headed toward a crossroads on Tuesday over setting a peacemaking path with the Palestinians and its future as a key partner in Ariel Sharon's coalition government.

At the opening of a Labour Party conference on Monday, its leader, Defense Minister Binyamin Ben-Eliezer, rejected demands by dovish members to end the partnership with the right-wing prime minister.

"It should be clear that quitting the government would cause the immediate cessation of the building of the separation fence," Ben-Eliezer said about a planned 210-mile barrier along the frontier with the West Bank to keep Palestinian bombers out of Israel.

The defense chief has been a strong advocate of the yearlong, 220 million U.S. dollar project, which some right-wingers have said would set a de facto border that could weaken Israel's claim to land occupied in the 1967 Middle East war.

Ben-Eliezer also voiced support for a Palestinian state and the dismantling of some Jewish settlements in the West Bank and Gaza Strip under a future peace deal. But he said he objected to any unilateral move to uproot them.

Some 4,000 delegates were to vote on ratifying Ben-Eliezer's vision of peace on Tuesday, while Israeli occupation forces he oversees continue to occupy seven Palestinian cities seized recently.

Underscoring a point of contention with Sharon, Ben-Eliezer said, "there will be no choice but to evacuate...within the framework of a peace agreement" settlements in the heart of the Gaza Strip and in hard to protect areas in the West Bank.

Ben-Eliezer's main rival in the Labour Party, Haim Ramon, has called for an immediate and unilateral Israeli withdrawal from the West Bank and Gaza Strip.

SHARON SAYS GOVERNMENT WILL DISCUSS PEACE

In what appeared to be either an attempt to steal the limelight from Ben-Eliezer or to bolster his coalition ally, Sharon told reporters his government was beginning internal discussions on future peace moves.

Adopting a term that Ben-Eliezer has used frequently, "peace horizon," Sharon said the time was not ripe to spell out steps Israel might take and in any case, no peacemaking could begin "until terrorism stops."

Sharon pointedly noted that he would be holding consultations on a peace agenda with the Defense Ministry and Foreign Ministry, which is headed by another Labour Party leader, Shimon Peres.

PALESTINIAN ANGER AS U.S. SIDELINES ARAFAT

The Palestinian Authority has reacted angrily after US Secretary of State Colin Powell said Washington would no longer deal with Palestinian leader Yasser Arafat.

Palestinian officials said sidelining Mr. Arafat would lead to anarchy and violence, and called on Palestinians not to meet Israeli or American delegations in response.

Speaking on US television on Sunday, Mr. Powell said the US had no plans to speak to Mr. Arafat either now or in the future.

His comments came days after US President George W Bush urged Palestinians to replace Mr. Arafat with a leader "not compromised by terror".

Groups affiliated with Palestinian Authority Chairman Yasser Arafat's Fatah movement have meanwhile called upon all Palestinian organizations, including the Islamic movements, to attack Zionist and American targets everywhere in response to US efforts "to remove the legitimate leadership of the Palestinian people."

Fatah's military wing, al-Aksa Martyrs Brigades, issued a statement Monday in which it threatened "to strike at Zionist and American interests and installations" in Israel and throughout the world if the United States maintains its opposition to Arafat.

The statement warned US President George W. Bush that it will return to the type of fedayeen operations that prevailed in 1970s if the conspiracy against Arafat continued.

The statement called for boycotting US Secretary of State Colin Powell and said there is a conspiracy to harm the Palestinian leadership.

Arafat later issued a statement distancing himself from the Fatah statement, saying it was not made in his name.

PALESTINIAN STREET ANGER TILTING AGAINST PA

In a Gaza City march, demonstrators expressed their anger at the PA, accusing it of corruption, but stopped short of attacking Arafat. At the end of the rally, demonstrators shouted slogans in support of Arafat in response to Bush's call to oust him, according to a Palestinian source. But in general, the mood was against the PA, the source added.

"There is no problem with al-Khetiar [the old man], but all faces around him must be removed," said Ahmad el-Laham of the Khan Yunis refugee camp, as others nodded agreement.

"Some of those who should be serving the public are robbing the public," said Tawfik al-Mashwaki. He said he traveled five hours through Israeli checkpoints to attend the rally.

Most of the demonstrators were Palestinian laborers. The crowd marched on Arafat's damaged headquarters to express its anger.

LATEST ISRAELI ATROCITIES AGAINST PALESTINIANS

The occupation army meanwhile continued widespread arrests of Palestinians.

Occupation soldiers Monday arrested Nizal Sawiftah, the head of Islamic Jihad in Tubas, northeast of Nablus.

Security forces arrested Bilal Mohtasab, a Hamas activist, and Munzar Jimil Abdel Razek Jaisidi, affiliated with Tanzim, in Hebron, and a Hamas activist in Nablus.

More Palestinians suspected of Resistance activities were arrested in a village south of Tubas, and in Dahiniye and El-Bureij in the Gaza Strip.

According to Palestinian reports, occupation forces arrested a Palestinian woman in Nablus who was planning to carry out a bombing in Israel.

Occupation soldiers also arrested a Palestinian at the A-Ram roadblock north of Jerusalem when he attempted to snatch one of their weapons.

Occupation soldiers checking a deserted car in Hebron found a pipe bomb, ceramic flak jacket, a fragmentation grenade, and bullets.

At the Dehaishe refugee camp southwest of Bethlehem a bomb was thrown at a tank.

Early Monday, occupation forces entered the villages of Adora, west of Hebron, Beit Rima, northwest of Ramallah, and Salfit, south of Ariel and north of Ramallah, to search for suspects involved in Resistance attacks.

In the Gaza Strip, a bomb was thrown at an occupation army patrol operating near Rafah. One occupation soldier was lightly wounded and hospitalized. Occupation forces later demolished three shacks on the outskirts of Rafah. According to Palestinian sources, the occupation army destroyed eight houses.

PHOTO CAPTION

An Israeli soldier patrols while enforced by a tank on the streets of Deheisheh refugee camp July 1, 2002 near the West Bank city of Bethlehem. Israeli forces tightened their grip in West Bank after the militant Islamic group Hamas vowed to avenge Israel's killing of one of its top bomb-makers who Israel said was responsible for the deaths of nearly 120 people, threatening a new spasm of violence in a 21-month-old Palestinian uprising against Israeli occupation. REUTERS/Magnus Johansson