Israeli forces have entered the West Bank town of Nablus, in one of their biggest military operations for months.
Israeli troops have been conducting house-to-house searches
Troops sealed off the casbah and carried out house-to-house searches for fugitives and bomb factories in an operation beginning on Wednesday night.
Mahmoud Aloul, the city's mayor, said soldiers were blowing open doors and rounding up residents for questioning.
The action continued as diplomats in Egypt discussed the proposed Israeli withdrawal from the Gaza Strip.
Representatives from the US, Russia, the European Union and United Nations - the Middle East "Quartet" - were meeting in the Red Sea resort of Taba.
They backed an Egyptian proposal to send up to 200 security officials to retrain Palestinian Authority police in Gaza after the withdrawal.
At the same time, Egypt's intelligence chief Omar Suleiman held talks with Palestinian leader Yasser Arafat, who agreed to overhaul his security apparatus.
In Nablus, Israeli soldiers demolished at least one house after they said they had found found explosives.
They said they were looking for seven men, mostly from the militant al-Aqsa Martyrs' Brigade.
According to reports, soldiers fired tear gas and bullets at a group of Palestinians. Hospital officials say two people were wounded.
Palestinians said the men were shot after they threw stones at soldiers, but the Israeli army said one of them had thrown a firebomb and the others opened fire.
An Israeli military spokesman said that the operation was likely to continue for several days.
In Gaza, Israeli soldiers shot and killed two Palestinians, who approached an outpost near the Jewish settlement of Dugit.
The army said the men were wearing bullet-proof vests and were armed with rifles and grenades.