Palestinian gunmen wounded four Israelis in a shooting on their car near a West Bank Jewish settlement, denting a militant cease-fire which is vital to a US-backed peace plan.

The al-Aqsa Martyrs Brigades, an armed group linked to President Yasser Arafat's Fatah faction, claimed the attack in which an Israeli woman and her three children were wounded in the shooting near the Jewish settlement of Har Gilo Sunday.

The incident dented a three-month cease-fire declared by Palestinian militants on June 29 and overshadowed fresh progress on a US-backed "road map" to peace, including a decision by Israel to release hundreds of Palestinian prisoners this week.

Israeli officials said the attack underscored the need for moderate Palestinian Prime Minister Mahmoud Abbas to disarm militants rather than cut deals with them to temporarily halt attacks in a 34-month-old uprising for statehood.

"Tonight's terrorist attack is another grim reminder, and a bloody one, that there is no substitute...for sustained targeted and effective operations against those involved in terrorism," Prime Minister Ariel Sharon's spokesman Raanan Gissin said.

The proximity of the attack to Bethlehem, from where Israeli forces pulled out a month ago as part of the road map, could complicate negotiations between Israeli and Palestinian officials over which West Bank cities Israel would withdraw from next.

Palestinian Security Affairs Minister Mohammad Dahlan wants Israeli forces to withdraw from Ramallah, the West Bank's commercial capital and home to Arafat's headquarters.

To that end, Palestinian police confined 20 militants from the al-Aqsa brigades who had been sheltered in Arafat's "muqata" compound to a single room to stave off a threat by the brigades to pull out of the cease-fire if they were transferred.

Palestinian officials said Israel had been pressing Arafat to send the men to the West Bank desert city of Jericho as a precondition for an Israeli pullback from Ramallah that would ease his own confinement.

The involvement of the al-Aqsa brigades in Sunday's shooting and the group's vow to carry out more attacks was an embarrassment to Abbas's administration which has failed to fully curtail attacks by the brigades since the truce began.

ISRAEL TO FREE PRISONERS THIS WEEK

Meanwhile, an Israeli ministerial committee on prisoners announced that several hundred Palestinian prisoners would be released later in the week as a goodwill gesture to strengthen the hand of Abbas, who is also known as Abu Mazen.

Officials declined to give details of the exact number of prisoners earmarked for release, but Israel Radio said a ministerial committee had compiled a list of 443 Palestinian prisoners who would be freed as early as Wednesday.

"Israel decided to free a few hundred prisoners that have no blood on their hands as a show of good will to Abu Mazen's government," Justice Minister Tommy Lapid said after the meeting.

Militant groups, including Hamas and Islamic Jihad, have said they may dissolve the truce if Israel fails to free all 6,000 Palestinian prisoners held in its jails.

Israeli Foreign Minister Silvan Shalom rejected an offer by his Palestinian counterpart Nabil Shaath to extend the truce with militants if Israel carried out troop withdrawals in the West Bank and other steps mandated by the road map.

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