Israel (search) will scale back its military operations in the West Bank (searchand Gaza Strip (searchif the Palestinians pledge to halt attacks on Israel, a senior defense official said Thursday as Palestinian militant groups gathered in Egypt for talks.

Deputy Defense Minister Zeev Boim's comments, which came a day after Israel said it had thwarted a homicide bomb attack on a school, were the clearest statement yet that Israel would respond favorably to a cease-fire offer.

Negotiations between various Palestinian factions in Cairo were being mediated by Egypt and were aimed at achieving some sort of truce in exchange for a halt by Israel of targeted killings of militant leaders and raids on Palestinian population centers.

"If the Palestinians agree to a cease-fire in Cairo, it's certainly not out of the question that Israel will agree to restrain its military activity," Boim told Israel Radio.

In other developments, Israel's Housing Ministry said it had authorized new housing construction in the West Bank settlement of Ariel. Palestinians condemned the announcement and said it endangered the chances of success in Cairo.

Israel announced the arrests of the alleged homicide bombers late Wednesday, hours after declaring a terror alert in parts of northern Israel.

The restrictions were lifted after Israeli troops raided a mosque in the West Bank village of Bardala, arresting two men, said Tadji Sawafta, a local official.

Israeli media reported that one was wearing an explosives belt of the type used in homicide bombing attacks.

Bardala is on the line between Israel and the West Bank, nine miles south of the Israeli town of Beit Shean.

Dore Gold, an adviser to Israeli Prime Minister Ariel Sharon, said the attackers planned to carry out a homicide bombing in a school in the Israeli town of Yokneam.

He said it "demonstrates the necessity of Israel's ongoing security measures including the completion of its security fence," a barrier Israel is building that has drawn criticism because its route cuts deep into the West Bank to encircle Israeli settlements.

The army also announced Thursday that it had confiscated an envelope full of explosives in a mail truck in the Gaza Strip bound for Israel. No further details were released.

Meanwhile, an advertisement published in an Israeli newspaper invited contractors to bid for the construction of 13 homes in Ariel, the second-largest West Bank settlement, near the Palestinian city of Nablus.

Palestinian peace negotiator Saeb Erekat said the expansion of Ariel threatened the Cairo cease-fire efforts, which were beginning Thursday.

"We're about to engage in a serious Palestinian-Palestinian dialogue," Erekat said.

"I want to call upon the Israeli government to stop thinking unilateral, and to refrain from more settlements, walls and incursions, and to think bilateral," he added.

Palestinian Prime Minister Ahmed Qureia hopes to present the truce offer to Israel and resume stalled talks on the U.S.-backed "road map" peace plan.

The road map envisions an independent Palestinian state by 2005. In the interim, it calls on Palestinians to halt violence against Israel and forbids any new Israeli settlement activity.

Israel, while accepting the road map in principle, has continued to allow "natural growth" in existing settlements like Ariel.

In addition, dozens of unauthorized outposts have sprung up in the West Bank since the road map was unveiled last spring. The outposts, which typically include no more than a few caravans, have angered the Palestinians and the United States.

Israeli officials have pledged in recent weeks to dismantle unauthorized outposts, but so far have taken little action on the ground.

Boim, the Israeli deputy defense minister, said that Israel on Wednesday had dismantled the unmanned outpost of Karmi Tsor, in the Gush Etzion bloc south of Jerusalem. The outpost consisted of a skeleton of a bus stop, he said.

In a radio interview, Boim conceded that Israel has slowed its efforts to pull down outposts in recent months. He blamed the Palestinians for failing to halt violence.

"It's difficult to ask ourselves to do something, when you see the other side not only is doing nothing, but in fact the opposite is happening and terror is moving forward," he said.