Thousands of Palestinians poured onto the streets of Nablus on Monday in defiance of a 40-day-old Israeli army curfew, the strongest challenge yet to the Israeli army restrictions on West Bank cities and towns.

If Nablus residents effectively lift the around-the-clock curfew on their own, such actions could spread to other West Bank cities. Nablus Gov. Mahmoud Aloul, who had urged his people to defy the curfew, said Palestinians should follow the Nablus model.

"People who can't find food and need medicine and treatment should break the doors of their jail," Aloul said in an interview with The Associated Press.

Early Tuesday, a Palestinian entered a house in the Jewish settlement of Itamar near Nablus and stabbed a settler and his wife, seriously wounding them, rescue officials and Israel Radio said, adding security guards at the settlement killed the infiltrator.

Shops, banks and offices opened to accommodate the curfew breakers, who filled the streets of Nablus. "I've been confined to my home for more than a month. I have eight children, we've eaten all we have," said Tamer Adnan, working at his felafel stand. "I'm just fighting to get food for my kids."

Israeli soldiers in armored vehicles ringing the city stood by without response, in contrast to tough reactions to earlier violations in which troops have even opened fire on people because of misunderstandings over the curfew's duration.

"There is a curfew and we are aware of the violations," military spokesman Lt. Col. Olivier Rafowicz said Monday of the situation in Nablus. "For the moment, we are not responding."

In some cities, the curfew is often lifted during the day, and then reimposed before nightfall. But the restrictions have been particularly tight in Nablus, where the curfew has been officially lifted five times, for a few hours at a stretch, in the last 40 days.

On Monday, the curfews were lifted for the day in Tulkarem, Qalqiliya and Hebron.

The restrictions, imposed when Israeli forces took over seven of the eight main Palestinian population centers starting June 20 in response to homicide bomb attacks, have worsened already difficult conditions for Palestinians in the West Bank. International aid agencies warn some are facing malnutrition.

Preliminary figures from a U.S. government report show that 30 percent of Palestinian children are suffering from malnutrition, up from 7 percent since the fighting began.

In response, Israel pledged to release $15 million to the Palestinian Authority on Monday, the first such transfer since fighting erupted in September 2000.

The transfer, the first of three planned installments, is a small fraction of the estimated $600 million in taxes and customs revenues Israel has collected on behalf of the Palestinians. Up to now, Israel has refused to release the money, contending it might be used to finance terror attacks.

Under interim peace accords, Israel collects customs and taxes for Palestinian goods transiting Israel and transfers the money to the Palestinian Authority.

Israel has explained the drastic measures of confining hundreds of thousands of Palestinians to their homes while, in effect, reoccupying towns and cities turned over to Palestinian self-rule in 1994 and 1995 by pointing to dozens of homicide bombing attacks that have originated in the West Bank.

The curfews, added to roadblocks, travel restrictions and a ban on Palestinians working in Israel, have wrecked the Palestinian economy through nearly two years of fighting and left thousands of families dependent on food handouts from international aid organizations.

While the Israelis cite security, Palestinians charge that Israel is trying to destroy their infrastructure and bring down the Palestinian Authority, headed by Yasser Arafat.

In Paris, Israeli Foreign Minister Shimon Peres said his government plans to allow Palestinian workers in increasing numbers to return to their jobs. However, he said, "It's not simple because past experience shows that from time to time, the people that worked in Israel throw bombs against people who employ them."

A statement from Israeli Prime Minister Ariel Sharon's office said the number of work permits would be raised from 7,000 to 12,000. Before the fighting, about 125,000 Palestinians worked in Israel.

But Arafat was also dealt a blow Monday from within, when the newly appointed interior minister canceled a trip to the United States over a disagreement with him.

Abdel Razak Yehiyeh wanted to appoint a police commander and dismiss seven officers, but Arafat canceled the orders, a Palestinian official said on condition of anonymity.

Yehiyeh was a key part of Arafat's Cabinet reshuffle June 13, a move meant to slim down the Palestinian Authority security arm.

The official said Yehiyeh complained that under the new arrangement, Arafat does not have the authority to cancel his orders.

In Hebron, about 100 people marched through the Palestinian-controlled section of the city with the body of a 14-year-old girl shot to death on Sunday, apparently by Jewish settlers. The settlers were bringing the body of a soldier killed in a Palestinian attack to their cemetery when a riot erupted. Nizin Jamjoum was shot while standing on her balcony, Palestinians said.

Weeping, the girl's brother called the riot terrorism by settlers. "If not today, then maybe tomorrow or after one month, I will avenge the killing of my sister," Marwan Jamjoun said.

Israeli soldiers control part of the middle of Hebron to protect about 450 Jewish settlers who live in three enclaves.

Also Monday, a Palestinian cameraman for Dubai TV was beaten by soldiers when he tried to return to his home in Jerusalem from Ramallah, the station's correspondent said. The Israeli military had no immediate comment.