Prime Minister Ariel Sharon (searchpostponed a decision on the path of a security fence through the West Bank (search), a minister said Wednesday, a day after Washington warned Israel might lose part of $9 billion in loan guarantees over the barrier.

The Israeli security Cabinet was to have met Wednesday to decide whether the security barrier should include several Jewish settlements deep in the West Bank.

Israeli government officials said John Wolf (search), a U.S. envoy to the Middle East, raised specific objections to a stretch of the barrier planned to cut into Palestinian territory south of the Jewish settlement of Ariel.

Wolf told Amos Yaron, the director general of the Israeli Defense Ministry, that money spent on construction of that segment would be deducted from the loan guarantees.

Israeli Housing Minister Effie Eitam said the Cabinet meeting was called off because of growing U.S. pressure.

"Those who are postponing and oppose building the fence along the route that the security establishment has recommended are the Americans and they are applying pressure," Eitam told Israel Army Radio.

Israeli media said a majority of the 11 members of the security Cabinet support building the next stretch deep in the West Bank, to include large Jewish settlements on the "Israeli" side. The reports said Sharon called off the meeting -- and a decision -- to avoid confrontation with Washington.

Paul Patin, spokesman of the U.S. Embassy in Tel Aviv, said no decision has been taken yet on whether to apply penalties over the partially built 370-mile barrier of fences, trenches, razor wire and concrete walls. He said Washington is following developments closely.

"Our position on the fence is that the fence itself is not a problem ... but if the fence goes into Palestinian territory ... then it becomes a concern of ours and we are discussing it among ourselves and we are discussing it with the Israelis," Patin said.

President Bush has called the planned barrier a problem, partly because in some areas Israel has expropriated Palestinian lands, while in others Palestinians have been separated from their lands.

Israel says the fence is essential to stop Palestinian bombers and gunmen slipping into Israel to carry out attacks. In the 1967 Mideast war, Israel captured the West Bank and Gaza Strip, lands Palestinians want for a future state. Palestinians fear the barrier will become a de facto border.

Also Wednesday, Palestinian officials expressed new concern about Yasser Arafat's (searchfate after the United States vetoed a U.N. Security Council resolution that sought to shield the Palestinian leader from possible Israeli action.

Chief Palestinian negotiator Saab Erekat said he feared Israel would see the U.S. veto as a green light to harm Arafat.

"I hope that Israel will not interpret the killing of this resolution as a license to kill Arafat," he told The Associated Press.

Ziad Abu Amr, a member of the outgoing Palestinian Cabinet, said the veto was liable to deepen anti-American sentiment in the Arab world. "Clearly this is not a neutral position," he said.

The rejected draft resolution would have demanded "that Israel, the occupying power, desist from any act of deportation and to cease any threat to the safety of the elected president of the Palestinian Authority."

U.S. Ambassador John Negroponte said the resolution was unbalanced, as it did not contain a condemnation of terrorist groups behind homicide attacks against Israel.

The Israeli government last week voted to "remove" Arafat, without giving clarification. Vice Premier Ehud Olmert said earlier this week that killing Arafat was an option, but Foreign Minister Silvan Shalom later backtracked on the remark.

Early Wednesday, in the West Bank city of Nablus, an armed Palestinian was killed in a firefight with Israeli troops. The army said troops patrolling the city's old market area came under fire from a Palestinian and shot him dead. Palestinian security sources said the dead man was an activist in the Al Aqsa Martyrs' Brigades, loosely linked to Arafat's Fatah organization.

Shops and businesses in Nablus were closed on Wednesday in protest at the killing, residents said.