The report, published by the Jane's Information Group in London, says the goal of the action would be to destroy Palestinian armed forces and the Palestinian Authority, forcing Chairman Yasser Arafat back into exile, as he was for 12 years after the 1982 Israeli invasion of Lebanon.
The plan calls for air strikes by F-15 and F-16 fighter-bombers, a heavy artillery bombardment, and then an attack by a combined force of 30,000 men, including paratroopers, tank brigades and infantry, reports CBS News Correspondent David Hawkins.
Israel's Arab neighbors, Syria, Jordan and Egypt are expected to stay out of the fight but the report considers the possibility that Iraq might try to intervene with troops, who would be destroyed by the Israeli airforce. It also states that Egypt could invade the Sinai peninsula, forcing Israel to call up its reserves.
The report indicates that Israel expects up to 300 of its troops to die in such an attack, with Palestinian deaths in the thousands.
"That there is an Israeli contingency plan to re-occupy the Palestinian areas comes as no surprise at all," said Francis Tusa, a defense analyst. "That it is being pushed up the list and that it's a leading option this is coming as a bit more of a surprise and a worrying one."
The Jane's report indicates that the plan was presented to the Israeli cabinet on July 9. It reflects a possible change in thinking in the current government earlier governments rejected a military solution to the Middle East dispute.
But Israeli Prime Minister Ariel Sharon dismissed the rumors of war Thursday, saying he has no plans to escalate the conflict.
"There is no imminent danger of war I also don't see either a deterioration or escalation but I definitely see a situation in which terrorism continues," Sharon told reporters on his plane en route to his first official visit to Italy.
"People in the military get paid to make plans all the time," cautioned Hirsch Goodman, an Israeli military analyst. "There are plans and there are plans."
Foreign Minister Shimon Peres said no such plan was ever submitted or discussed. "I'm so happy to see that such an important journal has such a fertile imagination. It simply didn't happen," he told Israeli army radio.
Four Jewish settlers, including a baby, were wounded in shootings Thursday, reports CBS News Correspondent Robert Berger.
In response, Israeli tanks shelled Palestinian targets in Nablus, killing a Palestinian policeman. More than 10 tank shells exploded within seconds of each other, sending white smoke into the air over Nablus.
An Israeli military official said soldiers took over a hill overlooking Nablus. The incursion is one of only a few such incidents which anger Palestinians since Israel and the Palestinians adopted a U.S.-brokered truce on June 13.
Learn more about the history of the Arab-Israeli conflict.
Overall at least 480 Palestinians, 124 Israelis and 13 Israeli Arabs have been killed since a Palestinian uprising against Israeli occupation in the West Bank and Gaza erupted last September after peace talks stalled.
A meeting of Israeli and Palestinian security officials assessing the implementation of the U.S.-brokered cease-fire broke up late Wednesday amid bitter recriminations.
Palestinian officials complained of what they said were serious Israeli truce violations, including the killing of a Palestinian woman near an Israeli checkpoint Wednesday, and the demolition of Palestinian homes in the Gaza Strip and Jerusalem this week.
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