Israeli Foreign Minister Shimon Peres and Ahmed Qureia, a key lieutenant of Palestinian leader Yasser Arafat, have been conducting talks aimed at a renewal of stalled peace talks, Israel said Monday. 

Meanwhile, violence flared again. In the West Bank, a Jewish settler was wounded in an ambush by Palestinian gunmen. A militia linked to Arafat's Fatah faction claimed responsibility for the attack, in which it said one of the attackers was killed when the Israeli returned fire. 

A caller claiming to be from the al-Aqsa Brigades militia said the attack was in response to Israel's refusal to allow Arafat - who is trapped in the West Bank town of Ramallah by Israeli restrictions - to attend Christmas ceremonies in Bethlehem. 

Despite European and U.S. pressure, Israel remained unbending in its decision to ban Arafat from traveling, demanding he first arrest two militants Israel said were behind the killing of its tourism minister. 

Speaking to his people on Palestinian TV, Arafat said, ``The Israeli tanks, the barriers and the rifles of the oppressors have prevented me from sharing with you our annual celebration on this divine and blessed occasion.'' 

A joint statement by Peres and Prime Minister Ariel Sharon on Monday confirmed Peres' talks with Qureia, saying they aimed to ``bring about an end to the terror, violence and incitement in order to allow progress to be made in the diplomatic process.'' 

Sharon has repeatedly declared he will not negotiate with the Palestinians while violence continues, and his office had initially denied newspaper reports over the weekend that talks were taking place. 

Peres and Qureia met several times in recent weeks, but the statement did not say if they would meet again. 

Palestinian officials, speaking on condition of anonymity, have said the new proposals discussed by Peres and Qureia include a cease-fire followed within eight weeks by recognition of a Palestinian state in existing autonomy zones, which make up about 42 percent of the West Bank and two-thirds of the Gaza Strip. 

The remaining issues - expanded borders, Jewish settlements, Jerusalem and Palestinian refugees - would be negotiated over the next year, and implemented within two years, the officials said. 

Israel broke off ties with Arafat on Dec. 12, labeling him ``irrelevant'' following an ambush on an Israeli bus by Islamic militants that killed 10. Suicide bombings in Jerusalem and the port city of Haifa the week before killed 26. 

Israel announced Monday it had arrested two Palestinian brothers suspected of arming and guiding the suicide bomber who conducted the Haifa attack. Mohammed and Yussuf al-Karem were arrested on Dec. 6, four days after the bombing, by soldiers who entered the Palestinian-controlled West Bank village of Jelkamus, Sharon's office said in a statement. 

A year ago, Palestinian leaders turned down former Israeli premier Ehud Barak's offer of a Palestinian state in Gaza and more than 90 percent of the West Bank, including a foothold in Jerusalem. They cited several additional demands, and the offer was removed from the table after Sharon came to power in March. 

Barak criticized the latest round of contacts. He said Monday that Israel was ``throwing Arafat a life preserver'' while the world feels this is not the time to negotiate with him. 

Under the new proposals, the Palestinians would suffice initially with far less land but would not have to forego further demands, such as on the refugees issue, before gaining statehood. 

Palestinian leaders insist publicly that any Palestinian state must comprise all of the West Bank and Gaza. 

In a speech Monday, Arafat pledged: ``We will have our independent Palestinian state with Jerusalem as its capital (and) this is according to Arab and international will ... We will have a real peace in the land of peace.'' 

In a televised speech last Sunday, Arafat called for an end to violence, and on Friday the Hamas militant group formally agreed to stop suicide bombings and mortar attacks against Israelis. Seven Palestinians were killed in clashes between Palestinian police and supporters of militant groups last week. 

In Monday's attack, gunmen shot an Israeli outside the settlement of Einav, said the caller. The Israeli was shot in the chest and seriously wounded while in his car near the Shavei Shomron settlement, the army and rescue officials said. 

Three Palestinians from the al-Aqsa Brigades carried out the attack, said a member of the group in a phone call to an AP reporter. The Israeli returned fire, shooting and killing one assailant, the caller said. The two others approached the car and took the Israeli's pistol, the caller said. The army was checking this version. 

No reaction was available to this from the Palestinian Authority to the caller's claim the attack was in response to the restriction on Arafat.