The violence posed a new threat to efforts to make headway on a US-sponsored peace plan, with the Palestinian militant group Hamas threatening to avenge Israel's raid on the northern West Bank city of Nablus.

Hamas confirmed that it had lost two members of its armed wing in the operation. Another Palestinian who was shot as he hurled stones at the troops withdrawing from the area died later from his injuries, local medics said.

A 20-year-old Israeli marine commando died in an exchange of fire during the raid on a house in Nablus's Askar camp that the army said was being used as a bomb-making factory, a military spokesman said.

The raid came as Israel warned the Palestinian Authority that time was running out for it to crack down on militant groups -- or else its forces would do the job themselves.

Hamas's armed wing, the Ezzedine al-Qassam Brigades, warned that Israel would "pay a commensurate price" for the killings of Fayez Assader and Khamis Abu Salem in Nablus.

Hamas and Islamic Jihad are among several groups which called a temporary ceasefire in their campaign of attacks against Israel on June 29 but attached a raft of conditions, including an end to all "assassinations" by Israel of their members.

Asked whether the statement from the armed wing meant that the truce was over, Hamas political leader Abdelaziz al-Rantissi said: "Hamas is still committed to the truce it declared but ... Zionist violations will not go unanswered."

Palestinian officials also expressed fears that the truce, and any possible extension, may have been compromised by the killing

"We had a lot of meetings last week and we reached a very positive position from factions," culture minister Ziad Abu Amr told AFP.

"But I see the Israeli army are trying to prevent us from reaching any positive agreement with the factions."

Violence has drastically diminished in the past few weeks but Israel says the truce is unilateral and that the Jewish state is not bound by its terms.

An AFP photographer near Askar camp reported seeing a first dead body covered by a blanket near the building where the militants and Israeli troops had been engaged in violent clashes.

The army had dynamited and destroyed the building, apparently leading to both deaths. After the operation, troops placed the area under curfew and barred access to ambulances.

The Israelis also carried out house-to-house searches, although it was not immediately clear if any Palestinians were detained.

General Gadi Eisenkot said the targeted building was a bomb-making factory and insisted the incident was "not a violation of the truce. Everything was done to minimize victims in the operation".

Israeli army sources earlier said that soldiers fired an anti-tank rocket after coming under sustained gunfire.

Defence Minister Shaul Mofaz said the Palestinian Authority had until the end of September to demonstrate they were "taking care" of militant groups such as Hamas.

At that point "we will have to tell the PA, 'Either you're going to take care of this or we are going to take care of this.'"

Mofaz said the Palestinian Authority had so far "taken no action against (the terrorist organisations) or their infrastructures.

"The security services have to prepare for an outbreak of renewed violence and the army has received orders to prepare for such an eventuality."

Israeli authorities fear the hardliners are taking advantage of the truce to build up their arsenals and have become increasingly frustrated at what they perceive as a reluctance by the Palestinians to tackle the militants.

Palestinians have argued that any such bid would risk civil war.

Meanwhile, Israeli warplanes bombed the outskirts of villages in south Lebanon after Hezbollah militiamen attacked Israeli army positions in the disputed Shebaa Farms border district, Lebanese police said.

Fighter bombers fired 14 missiles in seven separate raids, they said.

The attack by the Shiite Muslim militant group, the first in the Shebaa Farms for seven months, followed a car-bomb explosion which killed a Hezbollah member in southern Beirut on August 2 and which both the militants and the Lebanese government blamed on Israel.

A senior Israeli official described the Hezbollah attack as "very serious".

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