After 16 days without an Israeli death in the Mideast conflict, Prime Minister Ariel Sharon said Sunday that Israel had made progress combatting Palestinian terror attacks. 

But "deep problems" remain, the Israeli leader added in remarks hours after Israeli forces captured two armed Palestinians approaching a Jewish settlement in the Gaza Strip. 

Israel's army launched its latest incursion into Palestinian cities after a trio of attacks that killed 31 Israeli civilians from June 18-20. Since then, Israeli troops have taken over all but one of the eight major Palestinian cities and towns in the West Bank. No Israelis have been killed but more than 30 Palestinians have died. 

The period marks one of the longest stretches without an Israeli fatality since the fighting broke out in September 2000, although Palestinian militants have still attempted to carry out attacks daily. 

The Palestinian leadership has demanded Israeli forces leave the West Bank cities. Israeli officials hint the open-ended operation could last months. That has raised Palestinian fears that Israel plans to dismantle the Palestinian Authority and concerns in Israel about the costs and new dangers involved. 

Israeli forces could remain in Palestinian areas for up to one year, until Israel finishes fencing off the West Bank from Israel, a senior security official said Sunday. Until the fence is completed, an Israeli presence in Palestinian towns and cities would be critical for preventing attacks, said the official who spoke on condition of anonymity. 

The Israeli official said that in all, some 1,800 Palestinians suspected of links to terrorism were being held by the army and the Shin Bet security service. 

Sharon credited his outgoing army chief of general staff, Lt. Gen. Shaul Mofaz, with "a great effort in confronting terrorism," particularly during the almost two years of persistent violence. 

"We have had some victories, but there still remain deep problems," Sharon said at a weekly Cabinet meeting in thanking Mofaz. 

In the northern Gaza Strip, armed Palestinians were approaching the Jewish settlement of Elei Sinai when soldiers opened fire, the army said. The Palestinians returned fire, though two of the men eventually surrendered and two more escaped, the army added. The men were dressed in camouflage uniforms and armed with assault rifles. 

Since the latest operation began, the army has arrested more than 300 suspected militants, and about half were on Israel's wanted list, said Defense Minister Binyamin Ben-Eliezer. Ten would-be suicide bombers were among those detained, and 14 bombmaking laboratories were discovered, he said. 

An earlier operation, Israel's Defensive Shield which began March 29 and lasted six weeks, netted 1,047 members of militant groups and 376 members of Palestinian security services allegedly involved in attacks against Israelis, the Israeli security official said. 

The current operation has kept hundreds of thousands of Palestinians confined to their homes, and while curfews have been relaxed a bit in recent days, Israeli authorities acknowledge that ordinary Palestinians are facing difficult living conditions. 

"At this time, our access to Palestinian cities is necessary to prevent terrorism," Mofaz told the Cabinet meeting, according to a briefing given by Cabinet Secretary Gideon Saar. But Mofaz added, "we must do everything in our power economically to relieve the Palestinian population." 

Meanwhile, in the West Bank city of Hebron, Palestinian security officers staged a rally against Palestinian leader Yasser Arafat's firing of a top Palestinian security chief. 

Arafat has been under Israeli and American pressure to restructure his overlapping security forces and direct them to stop terror attacks against Israel. This past week, Arafat dismissed three senior security leaders, including Jibril Rajoub, head of Preventive Security in the West Bank. 

Disgruntled security officers rejected Arafat's choice for a new West Bank security chief, Jenin governor Zuheir al-Manasra. The officers said al-Manasra was unsuitable because he was not from Preventive Security. 

About 300 demonstrators carried banners Sunday in Hebron saying "we support Rajoub" and chanted "Down with al-Manasra." 

Ahmed Salhoub, a Preventive Security officer, said he and other officers won't accept anyone to lead them other than Rajoub. 

"Arafat shouldn't punish [Rajoub], but promote him to a better position for what he has done for the Palestinian people," Salhoub said. 

Rajoub has said he was not seeking another post. 

"I might change this position in the future, after the elections," Rajoub told Palestinian radio, referring to January polls for the Palestinian Authority leadership and for the legislature. 

In another development, Israel's Cabinet also confirmed the appointment of Sharon's foreign policy adviser, Daniel Ayalon, as ambassador to the United States. The former ambassador, David Ivry, left his post in mid-April. 

On Saturday, a Palestinian mother and her 2-year-old daughter were killed by machine gun fire from an Israeli tank while traveling in a taxi in central Gaza, according to a spokesman for al-Aqsa hospital in Deir Balah. 

The Israel army said Sunday that an initial investigation "found that early in the morning near Netzarim, light weapons were fired after an army force identified suspicious figures." It said the army is checking whether two female Palestinian civilians were injured from the gunfire.