HIGHLIGHTS: Resistance Kills 2 Occupation Soldiers & Wounds 3 Others||Resistance Blows up Israeli Merkava Tank||Israeli Occupation Forces Foil Huge Car Bombing||Barghouti Challanges Israeli Court's Right to Try Him|| STORY: Israeli helicopter gunships destroyed a metal-working factory in the Gaza Strip early on Friday in apparent retaliation for Palestinian attacks that wrecked an Israeli tank and killed two soldiers.

Missiles slammed into the foundry in the Khan Younis refugee camp hours after Prime Minister Ariel Sharon, who had declared a day before that conditions were ripe for a possible peace breakthrough, vowed to keep up the fight against "terror" groups.

Sharon spoke after Israeli police, on heightened alert on the eve of the Jewish New Year holiday, thwarted an attempt to smuggle a 600-kg (1,320-pound) car bomb -- one of the largest ever discovered -- from the West Bank into Israel.

The Israeli army said the foundry was targeted "because it was used by a Resistance organization to make ammunition."
The owner, Abu Khalil, denied the allegation, saying his workers built parts for electric generators. "Why did they hit my foundry? I did nothing wrong," he told Reuters.

Witnesses said helicopters fired three missiles at the small factory, caving in the roof. The building was empty of workers at the time and no casualties were reported.

Adding to tensions, Marwan Barghouthi, a popular leader of the Palestinians' 23-month-old uprising against occupation, told an Israeli court on Thursday it had no right to try him on charges he masterminded attacks that killed 26 Israelis.

Barghouthi, considered a potential successor to President Yasser Arafat, is the first major Palestinian player to be brought to trial by Israel since the uprising erupted. Palestinians dismiss it as a political show trial.

TWIN ATTACKS IN GAZA STRIP

The air strike followed twin assaults by Palestinian Resistance. A bomb planted on a dirt road exploded next to a tank in the central Gaza Strip, blowing off the turret, burning one crew member to death and wounding two others.

It was the third time Palestinians have destroyed one of Israel's Merkava-3 tanks, among the most advanced armored vehicles. A coalition of Resistance groups claimed responsibility.

In a separate incident, one soldier was killed and a second wounded in a gun and grenade attack in the northern Gaza Strip.

Occupation troops shot the attacker dead. Al-Aqsa Brigades Resistance group claimed responsibility for the ambush.

Also on Thursday, a border patrol unit chased two cars near the Israeli coastal city of Hadera and found one rigged with explosives. Bomb disposal teams carried out a controlled blast.

I'M A 'FREEDOM FIGHTER'

Fighting between Israelis and Palestinians erupted during the New Year's holiday two years ago after Sharon visited a shrine in Jerusalem's Old City built on a site sacred to Jews and Muslims.

Handcuffed and in prison garb, Barghouthi -- a charismatic activist who heads Fatah in the West Bank -- declared to a Tel Aviv court on Thursday: "I am a freedom fighter."

Israel hopes Barghouthi's trial, which has gone into recess until October 3, will prove Palestinian leaders, including Arafat, have been behind killings of Israelis during the revolt. At least 1,535 Palestinians and 591 Israelis have been killed.

Thursday's incidents came just a day after Sharon said a peace breakthrough looked feasible for the first time, because Palestinians were realizing violence would not win them a state.

But in a visit to a military hospital, he told wounded soldiers: "I have to say that I also thought that it would be possible to end this in a shorter time but we have to continue."

The Gaza attacks and Israel's response cast further doubt on the "Gaza-Bethlehem First" deal reached nearly three weeks ago in which Israel was to ease its military clampdown if Palestinian police reined in militants

PHOTO CAPTION

(L) An Israeli soldier questions Palestinians as they try to cross from northern Jerusalem, at the Kalandia checkpoint toward the West Bank town of Ramallah Thursday Sept. 5, 2002. Security forces are on high alert as Israel braces for a possible new wave of attacks by Palestinain militants during the Jewish New Year's holiday which begins at sundown Friday. (AP Photo/ZOOM 77)
- Sep 05 12:06 PM ET

( R ) Marwan Barghouthi, leader of Palestinian President Yasser Arafat's Fatah movement, arrives handcuffed to a policeman at Tel Aviv's District court, September 5, 2002. Barghothi, facing murder charges in Israel's first civilian trial of a popular leader of the Palestinian uprising, rejected Israel's jurisdiction over him. "I don't recognize this court. This is a court of the occupation." Barghouthi said. Photo by Havakuk Levison/Reuters
- Sep 05 10:17 AM ET