A top Mideast envoy criticized Israel in especially tough language for moving too slowly on negotiations to open Gaza's borders, saying the country is behaving almost as if the withdrawal from the Gaza Strip never happened.

Without dramatic progress soon, a rare chance to revive Gaza's shattered economy — and the peace process — will be lost, James Wolfensohn (search) said in a letter to the U.N. secretary general and other international mediators obtained Monday by The Associated Press.

Violence, meanwhile, quickly escalated between Israel and the Palestinians after Israeli troops killed Luay Saadi (search), a top Palestinian fugitive, and a close accomplice in a pre-dawn shootout in the Tulkarem refugee camp in the West Bank. Saadi, the leader of Islamic Jihad's military wing in the West Bank, was blamed for the deaths of 12 Israelis in attacks in recent months.

Islamic Jihad (search) threatened revenge and launched at least two homemade rockets from Gaza into Israel, causing no injuries. Israel, which said it would not tolerate any attacks from Gaza since it pulled out of the territory last month, responded with an artillery assault on open fields in northern Gaza, the army said. There were no reports of injuries from the artillery.

Early Tuesday, Israeli aircraft also fired missiles at a building in the northern Gaza town of Beit Hanoun used by Al Aqsa Martyrs' Brigades militants and a second building housing an Islamic Jihad welfare institution in the Rafah refugee camp (search) in southern Gaza, the Israeli army said. The Rafah attack left a 65-year-old woman and a 4-month-old baby wounded with moderate injuries and lightly wounded three others, Palestinian health officials said.

Israel closed the Rafah crossing into Egypt, Gaza's main link to the outside world, shortly before it withdrew from Gaza. It also has severely restricted the passage of Palestinian laborers and goods in and out of Israel, the main Palestinian export market, since an earlier wave of rocket attacks right after the pullout.

Israeli officials say the measures are solely because of security considerations.

In his letter, Wolfensohn, a special envoy working on behalf of the United States and other foreign mediators, acknowledged such concerns but accused Israel of unnecessary delays in restoring movement across the borders. He said the stalling is preventing him from moving on to larger reconstruction efforts, such as tourism, agriculture and industrial projects.

"The government of Israel, with its important security concerns, is loath to relinquish control, almost acting as though there has been no withdrawal, delaying making difficult decisions and preferring to take difficult matters back into slow-moving subcommittees," Wolfensohn wrote in the Oct. 17 letter to U.N. Secretary-General Kofi Annan (search).

He said the differences could be quickly resolved, and expressed disappointment he failed to reach a solution during a trip to the region earlier this month.

"While the Palestinians were eager to come to closure, (Israel) preferred to leave difficult questions to committees that will not meet until after the Jewish holidays," he wrote. A month of Jewish holidays ends this week.

Among other issues, he said Israel delayed a key element of new border arrangements — the deployment of foreign inspectors from the European Union at Rafah.

The reopening of the borders is essential for economic recovery in Gaza, where unemployment is well over 30 percent.

"We all were hoping after the withdrawal the economic recovery will be enhanced. What has happened is exactly the contrary," said Palestinian Planning Minister Ghassan Khatib. "In the current situation, Gaza is really like a big prison."

The Israeli closures have cast a pall over Gaza during the current Muslim holy month of Ramadan — normally a time of celebration and shopping. With imports greatly hampered, store shelves lie bare, fruits like apples and bananas are hard to come by, and merchants complain that their businesses face ruin.

Basem Said, owner of a clothing store in Gaza City, said he has been waiting for weeks for a shipment to arrive from Turkey through an Israeli cargo crossing.

"I have only a few things left from last year's collection, and my customers are leaving my shop," he said. "The crossing is like oxygen for us."

Most of the goods that come to Gaza normally pass through Israel, and that border was more porous at times before Gaza militants fired rockets at Israel following the withdrawal. In the past, Israel had closed the border frequently because of violence or tension.

In his letter, Wolfensohn also criticized the Palestinians for raising salaries during a fiscal crisis, for their inability to control violence and chaos, and the Palestinian Authority's inability to function properly.

"My ... agenda is only a beginning — but it is a gateway through which we must step if we are to get back to the road map, and move to a settlement of this bitter and wasteful conflict," wrote Wolfensohn, referring to the stalled "road map" peace plan.

Israeli Foreign Ministry spokesman Mark Regev said the government wants Gaza to be a "success story" and understands the need to reopen the border crossings. But he said Israel's security must be kept in mind.

"We have to move ahead on the crossings issue by balancing the very real security threats with the desire to allow for maximum possible movement of people and goods," Regev said.

Israel's Army Radio said Defense Minister Shaul Mofaz would travel to Egypt on Wednesday for talks on the border issue, and officials said the Israeli Cabinet would discuss the matter Sunday.

Israeli officials pointed to last month's rocket barrage out of Gaza, as well as ongoing violence in the West Bank, as reason for moving with caution.