Israeli troops raided a hide-out of the Islamic militant group Hamas in the West Bank city of Nablus Friday. One Hamas member and an Israeli soldier were killed, while two Palestinians and two soldiers were wounded.

Elsewhere in Nablus, a Palestinian policeman was killed in fighting with Israeli troops.

Meanwhile, Orthodox Christians marked a somber Good Friday with no sign of a break in the standoff at Bethlehem's Church of the Nativity, which began April 2.

The Israeli raid began at about 4 a.m. and ended some five hours later, witnesses and the army said. Heavy gunfire erupted when Israeli forces converged on a three-story building on the edge of Nablus' Old City or casbah, which was the scene of fierce fighting last month between Israeli troops and Palestinian gunmen.

The targeted building was in Nablus' main commercial district, and about 16 surrounding shops were destroyed in the fighting, neighborhood residents said. They said they cowered in inner rooms of their apartments as the Israelis fired tank shells and heavy machine guns. The army said two bomb factories were found in the building, as well as a car full of weapons.

Adnan Asfour, one of the Hamas leaders in Nablus, said the raid was counterproductive. "What's going on is increasing our determination to continue our struggle, until we achieve our goals, such as an independent state."

In Bethlehem, four Palestinian policemen, weakened by lack of food, emerged Friday from the basilica built over Jesus' traditional birth grotto. One was treated at an Israeli hospital, and three were being questioned, the military said.

About 30 Palestinian gunmen and about 200 others remain holed up inside the church. The siege cast a dark cloud over Orthodox Christians' celebrations of Holy Week, which fall about a month later than Easter observances under the Western church calendar.

The army said the curfew in the heavily Christian Palestinian towns of Beit Jalla and Beit Sahour, adjoining Bethlehem, would be lifted later Friday to allow worshippers to attend Good Friday services.

In Bethlehem, Israel is insisting that the armed men inside the Church of the Nativity surrender or accept exile. Palestinian officials had proposed taking them to the Gaza Strip. Bethlehem's Palestinian mayor, Hanna Nasser, suggested solving the standoff with the same formula that ended the siege of Yasser Arafat's headquarters in the West Bank town of Ramallah a day earlier.

The Palestinian leader emerged Thursday from 34 days of effective house arrest in a few rooms inside his compound. He immediately embarked on a tour of damaged sites in Ramallah, the unofficial capital and commercial hub of the West Bank, visiting hospitals, the Education Ministry and a wrecked security headquarters.

To break the deadlock at Arafat's headquarters, the two sides agreed to allow six wanted Palestinians to be transported to a Palestinian jail in Jericho to be guarded by U.S. and British wardens.

Arafat is "deeply interested in solving the problem and I am sure that very soon this crisis at the Church of the Nativity will be solved in line with the principles of what happened in Ramallah," Nasser said. "I think everybody will buy this."

Speaking to reporters Friday, Arafat said he welcomed the U.S. plan for an international conference this summer, proposed Thursday by Secretary of State Colin Powell, with backing from the European Union, the United Nations and Russia.

Arafat said he had not been informed of the plan by the United States. "Until now, it is only an idea and we welcome it, but we have still not agreed to it," Arafat said, adding that he would consult with Arab leaders before making a decision. Arab League foreign ministers are to meet next week in Cairo.

Israel also said it was too early to commit to the idea. "We don't know the details yet of what Secretary Powell spoke about," said government spokesman Gideon Meir.

Israeli officials noted that in March, Prime Minister Ariel Sharon himself proposed a regional peace conference — Israel's response to a new Arab peace initiative under which Israel would withdraw from all territories it occupied in the 1967 war, in exchange for comprehensive peace with the Arab world.

At the time, Sharon said he wanted Israel, the Palestinians and Arab states to attend a regional conference, while his advisers said Arafat — branded by Israel as a terrorist — would not be welcome. Sharon staunchly opposes giving back all the territory captured in 1967.

According to the U.S. plan, the delegations at the conference would be led by foreign ministers, rather than heads of state, getting around the issue of Arafat's attendance.

The Associated Press contributed to this report.