Renewed clashes Tuesday between Hamas and Fatah militants wounded at least 12 Palestinians, including five children, raising fears that Palestinian territories could erupt in a much wider conflagration.

Friction between the two sides has been heating up since the Islamic militant group ended Fatah's four-decade control of Palestinian politics with a victory in January parliament elections.

Fighting Tuesday broke out in Gaza City just hours before international mediators met in New York to discuss whether to ease the financial siege on Hamas over its violent anti-Israel ideology.

Hamas gunmen later attacked a Fatah funeral procession in the southern Gaza Strip and three unarmed bystanders were wounded, witnesses said.

The funeral was for a Fatah gunman killed in a clash with Hamas on Monday. Fatah officials and witnesses said Hamas set off two bombs and opened fire on the procession, setting off a firefight between the two sides.

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The rival factions offered conflicting versions of what set off the pre-dawn violence in downtown Gaza City, just a day after three people were killed in fighting between the two sides.

Fatah said Hamas gunmen opened fire from a white Subaru at seven bodyguards protecting a house where a top Fatah activist, Samir Masharawi, was staying. The bodyguards fired back, and Fatah said at least one Hamas gunman was wounded.

Dozens of Hamas and Fatah gunmen then streamed to the scene, and eight more people were wounded in the sporadic gunbattles that followed, including five children ages 8 to 14 who were on their way to school, Fatah said.

None of the injuries was serious, Palestinian hospital officials said.

Hamas said Masharawi's bodyguards had kidnapped three members of Hamas' military wing earlier in the day and Hamas gunmen were seeking to free them. Masharawi denied the accusations, and said Hamas had kidnapped a Fatah member until he intervened to secure the hostage's release.

Later Tuesday, police outside Gaza City stopped a car carrying Hamas legislator Said Abu Musmah and an adviser to Haniyeh, Ahmed Yousef, at a roadblock and assaulted their bodyguards, Hamas lawmaker Salah Bardawil told Hamas Radio.

The bodyguards fired in the air, but nobody was hurt, Bardawil said.

The security forces are dominated by Fatah loyalists and ultimately answerable to that faction's leader, Palestinian President Mahmoud Abbas.

Preventive Security -- the force involved in the confrontation -- termed the violence a "random incident" and apologized for the officers' conduct.

In a statement, it said the Hamas officials' driver refused orders to turn around at the roadblock, sparking shots in the air and fistfights between police and the bodyguards.

Both Fatah and Hamas called for an end to violence after the early morning clash.

"We must show self-restraint, end all displays of arms, and employ only dialogue," Prime Minister Ismail Haniyeh of Hamas told a solidarity rally of about 1,500 people outside his Gaza City office.

Haniyeh was due later Tuesday to meet with Egyptian security officials, who visit Gaza regularly, to discuss ways to end the internal bloodletting.

Abbas, who was elected separately last year, said he has instructed security forces to restrain those instigating violence.

"Our main goal at this time is ... to end the economic siege of the Palestinian people," Abbas told reporters in the West Bank town of Ramallah.

The Hamas government is broke because of a Western and Israeli cash cutoff, and has been unable for the past two months to pay salaries that provide for one-third of the people in Gaza and West Bank.

The United States, European Union, United Nations and Russia met in New York to discuss how to proceed with international economic sanctions, which are designed to pressure Hamas to renounce violence and recognize Israel.

Secretary of State Condoleezza Rice said leaders would discuss a plan to relieve a shortage in medicine and health supplies in the Palestinian areas at the meeting.

On Monday, the World Bank warned that a humanitarian crisis in the West Bank and Gaza was looming.

In a letter to negotiators sent ahead of the meeting, Abbas accused donors of penalizing the Palestinian people for choosing Hamas in democratic elections.

"The Palestinian people should not be punished with deprivation," he said in Ramallah.

At the rally, Haniyeh called for an end to the international sanctions, but added defiantly, "We are not going to surrender, cave in to this siege, compromise the rights of our people or recognize the legitimacy of the occupiers on our land."

Meanwhile, a report by a Palestinian human rights group found a grave deterioration in the security situation in Palestinian territories in 2005 -- before Hamas took power.

A total of 176 people were killed in internal violence, including five suspected collaborators with Israel who were executed, Mamdouh Al Akar, chief of the Independent Palestinian Commission for Citizens Rights, told reporters. He gave no comparative figures for past years.

People disappeared, and Palestinians and foreigners were kidnapped or attacked, Al Akar said, without giving numbers. People were arrested in violation of procedure, some were tortured or mistreated during interrogation and fair trials were not guaranteed, he said.

His projections for the future were bleak.

"Up until now there has been no political will to control the security situation, and chaos continues," he said.