The raid came as Israeli security officials were debating a change in tactics, including holding cease-fire talks once incoming Palestinian Prime Minister Ahmed Qureia forms his Cabinet next week.
Israel's position until now has been to keep up strikes against Palestinian militants and not negotiate a truce unless Palestinian security forces begin disarming and arresting militants.
Meanwhile, an Israeli army officer has been charged with killing four Palestinians, including three children, by ordering his soldiers to fire tank shells to enforce a curfew, an army publication reported.
"Bamahane," a weekly for soldiers, reports in its current edition that the incident took place in Jenin in June 2002. The officer, a lieutenant in the armored corps, ordered tank crews to fire shells and machine guns to force Palestinians off the streets of the northern West Bank town.
And a fourth Israeli air force pilot has retracted his refusal to participate in targeted air strikes against Palestinians, reports the Israeli newspaper Haaretz. However, the number of pilots who signed the letter remains at 27, because four additional pilots have signed it since it was released.
In a Gaza refugee camp, about 3,000 people turned out Friday for a rally by the Islamic militant Hamas group. Young men in black masks marched carrying cardboard models of rockets and wore mock bomb belts made of wood. Some among the crowd burned Israeli and American flags.
A senior Palestinian official, meanwhile, said Yasser Arafat has agreed to relinquish some control over security forces and boost the authority of Qureia's designated interior minister, Gen. Nasser Yousef. Such a step would be in line with long-standing Israeli and U.S. demands that the Palestinians unite all security forces under one command.
Friday's arrest raid took place in Qabatiyeh, a town in the northern West Bank.
Palestinian security officials said Israeli soldiers fired at a coffee shop and then ran inside in search of wanted men, said Nasser Zakarneh, one of the patrons. Two electricians working outside the coffee shop and a customer were wounded, Zakarneh said.
Two of the wounded were taken to Israeli hospitals and the third to a local clinic, the security officials said, adding that about 20 patrons were detained for questioning. The Palestinian officials said that none of those wounded or detained were wanted by Israel.
The Israeli military said several patrons ran away and that soldiers shot at them after calling on them to halt and then shooting in the air. The officials said they did not immediately know whether any of the three wounded were fugitives. The army put the number of patrons detained at about 30.
In another development, Richard LeBaron, the deputy chief of mission at the U.S. Embassy in Tel Aviv, met with Amos Yaron, the director of Israel's Defense Ministry, on Thursday to discuss the route of a security barrier Israel is building in the West Bank. An embassy spokesman, Paul Patin, declined comment on the details of the meeting.
Earlier this week, Israel's Cabinet had approved a plan to build a series of fences deep in the West Bank to shield key Jewish settlements — as well as Israel — from Palestinian suicide bombers, who have killed hundreds of Israelis over the past three years. The fences would not immediately be linked to the main barrier section running closer to Israel's line with the West Bank.
The United States has said the barrier's route could be interpreted as an effort to pre-empt negotiations and unilaterally define the border of a future Palestinian state.
"Israel has no choice but to build a barrier so that suicide bombers can't just stroll across a field and murder 20 or 30 Israeli civilians at once," Israeli spokesman Dore Gold told CBS News Correspondent Robert Berger.
In Thursday's meeting, Yaron assured U.S. officials that Sharon will not link the new fences to the main barrier, Israeli media reports said.
Meanwhile, Israeli security officials said there is a debate on how to deal with the incoming Palestinian government. Some officials propose giving Qureia a boost once he takes office, by releasing Palestinian prisoners and removing a large number of army roadblocks.
Such moves have the support of Chief of Staff Lt. Gen. Moshe Yaalon, the officials said, but substantial discussions on any new cease-fire or other gestures toward the Palestinians have yet to begin and would have to be approved by Prime Minister Ariel Sharon.
Much would depend on Qureia's actions against militants, the officials said. Qureia has said that he would not risk a civil war by launching a major crack down on militants.
Officials in Sharon's office could not be reached for comment Friday.
A top Palestinian official said the messages were received from Israeli officials expressing a willingness to try to negotiate a cease-fire.
The Palestinian official said Arafat has agreed to give up some control over security forces.
For now, he directly controls four branches and the remaining four are under the command of the interior minister. Under the new arrangement, the interior and three deputies would control all eight branches, but would receive their orders from the 13-member National Security Council, which Arafat heads.