Meanwhile, Israel on Thursday published intentions to expand a Jewish settlement in the Gaza Strip — defying a stipulation in the U.S.-backed "road map" peace plan that says construction in Jewish settlements must stop.
At the demonstration in Qalqiliya, in the northern West Bank, protesters splashed a concrete separation barrier with balloons filled with green, black, red and white paint — the colors of the Palestinian flag — and hoisted a banner calling the fence an "apartheid wall."
The protest came as Israeli Prime Minister Ariel Sharon returned Thursday morning from talks in Washington with President Bush on the U.S.-backed "road map" peace plan, which calls for an end to the violence of the past three years and Palestinian statehood by 2005.
A visit to Israel by U.S. House Majority Leader Tom DeLay, an evangelical Christian and strong supporter of Israel, did not appear to be helping the peace process, reports CBS News Correspondent Robert Berger.
The Texas Republican described the cease-fire by Palestinian terror groups as a 90-day vacation for murderers, but offered sympathy for Palestinians in general.
"But their enemy is not Israel," he said. "Their enemy is Yasser Arafat."
Palestinian legislator Saeb Erekat described DeLay as an enemy of peace, and said his remarks were despicable and satanic.
The temporary cease-fire declared by Palestinian militants June 29 has largely held, but work on the road map has been frustrated by disagreement over the construction of the fence, which Israel says is needed to stop Palestinian attackers, and other issues.
The settlement building tender, published in a newspaper by the Israel Lands Authority, offers rights to build 22 new housing units in the Neveh Dekalim settlement and fulfills a key bureaucratic step in the expansion of settlements. It is the first such tender for a Gaza settlement in about two years.
Palestinians and Israeli peace activists blasted the move — which follows meetings in recent days by both sides' leaders with President Bush — as a blow to the nascent peace efforts.
"This is a very dangerous step taken by the Israeli government," said Nabil Abu Rdeneh, an aide to Palestinian leader Yasser Arafat. "It seems that the Israelis have either misunderstood the message which President Bush tried to send to both sides or that they took his message as a green light to violate the road map."
Early Thursday, overnight negotiations between Israeli Defense Minister Shaul Mofaz and Mohammed Dahlan, the Palestinian minister in charge of security, ended with no agreement on a promised Israeli withdrawal from two Palestinian towns.
Israeli officials, speaking on condition of anonymity, said Mofaz offered to turn over Qalqiliya another West Bank town, Jericho, to Palestinian security control. Israeli forces have already withdrawn from parts of Gaza and the West Bank town of Bethlehem.
The Palestinian side, however, insisted at the talks that any withdrawal from the Palestinian cities also be accompanied by steps to allow Palestinians to move around the West Bank more freely.
"We wanted the withdrawal to be a genuine one that would allow the Palestinian cities to connect with each other and would give people free ways to move on the roads between those cities and villages without having to go through the Israeli army roadblocks," Dahlan said Thursday.
It was unclear whether the Palestinians also contested the choice of cities for the withdrawals. In the past, Palestinian officials have said they wanted control of Ramallah, their West Bank administrative capital where Palestinian leader Yasser Arafat has been marooned for more than a year by Israeli forces.
The meeting was the first high-level session since separate summits between Bush and Sharon and Palestinian Prime Minister Mahmoud Abbas — whom Israel and the United States have backed in hopes he might emerge as a replacement for Arafat.
Sharon met Bush on Tuesday, and the American president threw his support behind the Israeli view that the Palestinian Authority must crack down on militant groups for peace to be achieved. Abbas has argued that confrontation with the militants could lead to civil war.
The separation fence that Israel is building in the West Bank has also emerged as a key sticking point between the two sides.
The barrier — which aims to block Palestinian attackers from reaching Israel — also drives deep into the West Bank to separate Jewish settlements from Palestinian areas, and Palestinians consider it an expropriation of their land.
Qalqiliya, which reaches up to the so-called Green Line dividing the West Bank from Israel, is surrounded on three sides by walls and fences, with prison-like watchtowers manned with Israeli soldiers rising up over the town, and it has become a focal point of Palestinian protest against the barrier.
"The wall is in complete contradiction of our interests. We are living inside of a prison," Qalqiliya Mayor Marouf Zahran said during Thursday's demonstration.
A single road to the east, along a corridor about a mile wide, is the town's only entry and exit route to the rest of the West Bank.
The barrier cuts off the city from 32 villages in the area — as well as from Israel to the west and Jewish settlements to the north and south — leading to the closing in recent years of some 600 businesses in Qalqiliya, officials say.
The city, however, also illustrates the reasoning behind the Israeli argument for the fence: Israeli military sources point out that Qalqiliya was a launching pad for suicide bomb attacks against Israel and therefore poses a deadly security threat. It is also the West Bank town that lies closest to Israel's main city of Tel Aviv, and is only a few hundred yards from a major suburb.
Townspeople counter that other Palestinian towns that launched attacks have not been surrounded by the fence. They add that the barrier is just inflaming passions that feed into support for militants.
Noha Nazzal, 32, from the Qalqiliya Union of Palestinian Women, argued at the protest that the whole road map peace plan favored Israel.
"What we need are RPGs (rocket-propelled grenades) and not a map," she said. "The road map is a project that serves Israeli security at the expense of our national rights."