An Israeli government source, meanwhile, said that the route of a security barrier being built between Israel and the West Bank might be altered to satisfy American and Palestinian criticism that parts of the fence dip far into Palestinian land.
On Thursday, U.S. Secretary of State Colin Powell told reporters in Washington that the United States had not yet made a decision about whether to reduce aid money to Israel if construction continues on sections of the barrier that are built beyond Israel's line with the West Bank.
"We have concerns about that fence," Powell said. "We have problems with it. We have expressed our concerns to the Israelis, and the Israelis are considering the problems that we have identified to them. We expect that dialogue to continue until we can find a solution."
Friday's pre-dawn gunbattle centered on a three-story apartment building in the Askar refugee camp, next to the northern West Bank city of Nablus. An army spokesman said a force searching for a Hamas leader came under fire from the building and shot back.
The battle came after a month of relative calm that followed a cease-fire declared by the main Palestinian groups on June 29. Though the truce has dramatically reduced the level of violence seen during nearly three years of violence, the Israeli military continues to send forces into West Bank towns and refugee camps nightly to arrest Palestinian terror suspects.
Israeli soldiers fired an anti-tank missile at the building's third floor, setting off several explosions. The military said the source of the blasts was either a crude explosives lab or a stash of weapons.
Palestinian witnesses said one person, apparently a gunman firing at the soldiers from the roof of the building, was killed. They said Israeli forces evacuated Palestinian families from the structure, which began to collapse and burn.
The army said soldiers were still searching for the target of the raid, a senior Hamas militant, but would not name him. Residents of the camp said the man being sought might be Khamis Abu Salem, 23, a fugitive from the Hamas military wing who rented a room in the building as a hide-out.
Also Friday, an Israeli government source speaking on condition of anonymity said that Israel could alter the route of a series of fences, trenches, razor wire and a wall that is being built between Israel and the West Bank.
Israel says the barrier is meant to keep suicide bombers and other attackers out of Israel, but the Palestinians are angered because parts of the winding fence plunge deep into the West Bank to include some Jewish settlements on the "Israeli" side of the barrier.
An initial 90-mile stretch has been finished in the northern West Bank, and two fences — 12 miles altogether — have sealed off Jerusalem's northern and southern outskirts from the West Bank.
The source said no decision had been made, but Israel might agree not to encircle the large West Bank Jewish settlements of Ariel and Emmanuel as planned. Incorporating the 18,000 residents of Ariel would mean building a 19-mile "finger" poking into the center of the West Bank.
Alterations to the route would have to be approved by Prime Minister Ariel Sharon and the Cabinet, the source said.
U.S. administration officials are considering a reduction in loan guarantees to Israel if construction continues on parts of the fence that go deep inside the West Bank.
More than a decade ago, the U.S. Congress authorized cuts in aid to Israel equivalent to the amount Israel spent on settling Jews in the West Bank and in Gaza.
The dollar-for-dollar formula now might be applied to the $9 billion in loan guarantees over three years and $1 billion in military aid approved in the spring to help compensate Israel for the economic impact of the war with Iraq.
The main question under consideration is whether building the 370-mile barrier is related to settlements, said a U.S. official on condition of anonymity. The Israelis have said the construction will cost about $2 million per mile.