Prime Minister Ariel Sharon said Tuesday that the Palestinians had backed out of a compromise by which Palestinian gunmen holed up in the Church of the Nativity in Bethlehem would be taken into Israeli custody to end a standoff there with Israeli troops.

Tuesday evening, gunfire broke out near the church compound with flares and gray smoke visible overhead. The Israeli army confirmed sporadic gunfire exchanges around the compound, but said its forces were not entering it. The army spokesman's office would not immediately provide further details.

No Palestinian official ever publicly endorsed the proposal spoken of by Sharon, and lower level Palestinians, such as policemen inside the church, adamantly rejected it.

President Bush told Sharon in a phone conversation Monday that ending the siege at the church was one of the top priorities for visiting Secretary of State Colin Powell, a Bush spokesman said.

Since April 2, Israeli troops and tanks have surrounded the church where more than 200 people, many of them armed Palestinians, have taken refuge. The Palestinians went into the church to evade Israel's military campaign in the West Bank aimed at tracking down militants believed responsible for deadly attacks in Israel.

About 50 members of the clergy are also inside the church, which according to Christian tradition is built over the birth site of Jesus.

Sharon said Israel, the Palestinians and Powell had worked out an agreement to end the standoff, but then the Palestinians rejected it.

"Today the situation has changed and we and the Americans support this process," Sharon told Army radio in an interview broadcast Tuesday. "The Palestinians apparently changed their position. Maybe they have some kind of hopes that there will be pressure on Israel."

According to the compromise detailed by Sharon, the Palestinians in the church would turn themselves over to the Israeli army. The military would then release all those not suspected of involvement in militant activity. Those who are suspects would be put on trial in Israel or expelled to an Arab country, Sharon said.

The Palestinian Authority and church officials have demanded that the army withdraw from the area. Their proposal is that the gunmen turn their weapons over to Palestinian police and be set free, but Israel has rejected this.

Conditions at the church have deteriorated in recent days with food supplies almost out, except for staples such as potatoes.

Pope John Paul ll on Monday called Father Ibrahim Faltas, a senior official who is one of those holed up in the church, in an effort to raise morale among the clergy.

"He said that he prayed for us, feels for us and does his best to end this crisis," Faltas said.