U.S. plans to penalize Israel for West Bank (search) construction by deducting $289.5 million from a loan guarantee package will only cost Israel a few million dollars a year, a punishment Palestinians dismissed Wednesday as a cosmetic step with no chance of affecting Israeli policy.

The deduction from $9 billion in loan guarantees promised over three years was intended to signal Washington's disapproval of Israel's settlement construction and plans to build part of a new security barrier deep inside the West Bank.

Violence surged Wednesday as Israeli troops in the Gaza Strip (search) killed two Palestinians and wounded one who were apparently planning to set up an ambush on a road used by Jewish settlers, Israeli military sources said. The military initially said all three had been killed.

Israeli officials shrugged off the loan guarantee penalty, and Israeli analysts and Palestinian officials called it a minor slap on the wrist.

"I'm afraid that this step, as a message, will not deter Israel," Palestinian Cabinet Minister Saeb Erekat said.

American officials threatened for weeks to reduce the guarantees. The amount of the penalty was determined Tuesday in negotiations between American and Israeli officials.

In Washington, State Department spokesman Richard Boucher (search) refused to say how much of the deduction applied to the security barrier.

The loan guarantees would allow Israel to borrow money at rates between 1 percent and 2 percent lower than its usual rate, Finance Ministry spokesman Eli Yosef said.

Without that lower rate, it would cost Israel an extra $5.8 million a year over the life of a replacement loan, usually between two and five years. By comparison, Israel's economy generates about $100 billion a year.

Palestinians, who reject the route of the barrier as an Israeli land grab, said that punishment was simply not enough.

"We want steps from the Americans that will definitely stop the settlements and the wall to give peace a chance," Erekat said.

Israeli officials confirmed they would not stop building the barrier, which they say is needed to protect the country from Palestinian militants responsible for the deaths of hundreds of Israelis over the past three years of violence.

In order to incorporate Jewish settlements in the West Bank on the "Israeli" side, the barrier's planned route dips deep into the territory in several areas along a snaking path of fences, walls, and trenches.

"We are determined to continue building this fence. This fence saves lives. This fence has already proven itself, and I think that the only way to ensure a real peace process is to continue building the fence," Israeli Foreign Minister Silvan Shalom said.

The northern section of the barrier runs mainly along the invisible frontier between Israel and the West Bank. But most of the recently approved 228-mile southern section lies within the West Bank.

Israel has said the barrier costs about $3.6 million a mile.

Israel's Channel 2 reported that a third of the money deducted from the guarantees -- or about $96.5 million -- was attributed to the barrier construction, with the remainder a penalty for settlement construction.

The deduction "is a fairly painless rap on the knuckles," said Israeli political commentator Yossi Alpher.

The move allows President Bush to say he is engaged in the Mideast peace process without angering any key constituencies in the run-up to next year's presidential election, he said.

"It's low-key, it's doing the minimum ... and it does not involve any political risk for the president," he said.

Also Wednesday, U.S. officials invited the Israeli and Palestinian organizers of an alternative peace plan to meet with Secretary of State Colin Powell, according to the plan's coordinators.

Palestinian intellectual Sari Nusseibeh and former Israeli security chief Ami Ayalon will meet Powell on Dec. 12 in Washington, said Dimitri Diliani, Nusseibeh's spokesman.

U.S. officials did not immediately comment.

The grass-roots peace plan calls for the creation of a Palestinian state in nearly all the West Bank and Gaza. Palestinians refugees then will give up their demand to return to homes lost in Israel during the 1948 Mideast war.

The backers of another unofficial plan, the so-called Geneva Accord, which envisions peace along similar lines, also expect to meet with Powell next month, although no date has been set, said Yossi Beilin, chief Israeli negotiator of the plan.

That accord gives Palestinians a state and could divide part of Jerusalem with a bulletproof glass wall, but keeps most refugees out of Israel.

A senior U.S. official, speaking on condition of anonymity, said he was certain negotiators Beilin and former Palestinian Information Minister Yasser Abed Rabbo would meet with U.S. officials while in Washington. But the official said a meeting with Powell on Dec. 5 had not yet been finalized.

Powell's encouragement of the new plans came as U.S. officials worked to jump-start the stalled "road map" peace plan, which envisions an immediate end to violence and the creation of a Palestinian state by 2005.

In their own efforts to further the road map, Palestinian officials said they plan to secure a pledge from militant groups meeting in Egypt next week to halt all attacks against Israel.