HIGHLIGHTS: The Most Serious Attack by Hezbollah since April 26, Occupation Army Spokesman||3 Israeli Occupation Soldiers Wounded in the Hezbollah Attack|| Palestinians Call off Talks after Four Killed by Tanks in Gaza|| Israel's "iron grip" will lead to "human catastrophe": UN|| EU Peace Plan Eyes Palestinian State Next Year|| STORY: Israel issued a stark warning to Lebanon and Syria, following an attack by the Damascus-backed Lebanese militia Hezbollah which wounded three soldiers, the first such incident in four months.

"I want to make it clear to the Syrians and the Lebanese that they are playing with fire" with such attacks, Israeli Defence Minister Binyamin Ben Eliezer said in a statement Thursday.

The Lebanese Resistance Shiite group launched a mortar and rocket attack on Israeli army positions in the disputed Shebaa Farms area, which injured three Israeli occupation soldiers, one seriously.

Two Israeli fighter bombers fired two air-to-surface missiles into an area near the Lebanese village of Kfarshuba facing the Shebaa Farms area, but there were no reports of casualties there, Lebanese police said.

At the same time, two Israeli helicopters combed the area, while Israeli artillery across the border pounded the same sector with about 20 heavy rounds.

An occupation army spokesman told AFP it was the "most serious attack" by Hezbollah since April 26.

Hezbollah claimed the attack in a statement saying its fighters had "fired shells and opened automatic gunfire on positions of the Zionist army in the Shebaa Farms."

Palestinians call off talks after four killed by tanks in Gaza

The Palestinian leadership called off high-level security talks with Israel after Israeli tank fire killed four members of a Palestinian family in the Gaza Strip, sending another shockwave through an already fragile plan to ease tensions between the sides.

A Palestinian teenager was also shot and killed, and 12 other people wounded when Israeli occupation troops carried out a raid into the battle-scarred southern Gaza Strip town of Rafah.

Palestinian officials said the talks between Palestinian interior minister Abdel Razaq al-Yahya and Israeli Defence Minister Binyamin Ben Eliezer were called off after Israel forces opened fire overnight on Palestinians living close to Netzarim settlement.

A 55-year-old woman and her nephew were killed on the spot, while the woman's two sons bled to death after ambulances were unable to access the scene, on the southern edge of Gaza City, for the intensity of Israel fire which last more than an hour, Palestinian medics said.

Ismail Haniya, a senior leader of the Palestinian Resistance group Hamas vowed bloody retaliation for the killings. "Our response will be a new escalation in our resistance," he told AFP.

Israel's "iron grip" will lead to "human catastrophe": UN

UN special coordinator for the Middle East Terje Roed-Larsen warned that the Palestinian population was facing an imminent "human catastrophe," and urged Israel to reconsider its security policies.

He revealed preliminary figures on the soaring levels of unemployment, income losses and poverty in the West Bank and Gaza Strip.

Those estimates show that overall unemployment in the West Bank and Gaza Strip rocketed from 36 percent to "approximately 50 percent" during the second quarter of 2002.

But Israel seemed unlikely to reassess its policy as the violence gradually heated up again after three weeks of relative calm.

Jenin Clashes

Armed clashes also erupted for a second day in Jenin refugee camp in the northern West Bank, where a Palestinian bystander was shot dead the day before in sharp exchanges of fire.

And in the northern West bank town of Nablus, the Israeli army dynamited nearly a third of the local headquarters of the Palestinian Authority, Palestinian security officials said.

EU peace plan eyes Palestinian state next year

In Denmark, Foreign Minister Per Stig Moeller said he plans to travel to the Middle East next week to present a new EU peace plan, notably proposing a provisional Palestinian state by 2003.

The three-stage peace plan, due to be discussed by EU foreign ministers gathering Friday and Saturday in the Danish port town of Elsinore, sets out a timetable aiming at the establishment of a full Palestinian state by 2005.

According to a copy of the plan seen by AFP, the first stage of the EU plan would involve negotiations this autumn, leading before the Palestinian elections next January to a security agreement allowing the withdrawal of Israeli forces from re-occupied Palestinian areas.

The second stage of the process "starts after Palestinian election in January 2003 and ends with the conclusion of an agreement on the creation of a Palestinian state with provisional borders by August 2003."

The third phase of the plan, after August 2003, would involve a final phase of negotiations aimed at the formal creation of a full Palestinian state "with limited arms" by 2005, according to the Danish presidency document.

At the same time peace talks would be launched between Israel, Lebanon and Syria, the plan suggests.

Denmark currently holds the rotating EU presidency, and has made the Middle East a key concern for its six months at the EU steering wheel.

Under the EU proposals, Israel and the Palestinians would share Jerusalem, while their territories would return to those of 1967, with a few "proportionate exchanges" of territory.

PHOTO CAPTION

Israeli medics and occupation soldiers attend to an unidentified wounded soldier after the helicopter that was carrying him landed in the northern coastal Israeli town of Haifa Thursday, Aug. 29, 2002. Hezbollah Resistance group in Lebanon shelled with a number of rockets and mortar shells two Israeli military outposts of al-Samaka and Roueissat el-Alam inside the disputed area of Chebaa Farms, wounding three soldiers and triggering retaliation from Israeli warplanes and artillery. (AP Photo/Herzel Shapira)
- Aug 29 6:41 PM