Israeli troops and Palestinian gunmen exchanged heavy fire in downtown Ramallah on Thursday, after undercover forces tried to arrest fugitives in the city's vegetable market.

Two Palestinians were killed and 25 were wounded, including the photographer for a local news agency, security officials and hospital doctors said. The Israeli military said it arrested four wanted men.

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Bursts of gunfire, loud booms and the wail of sirens could be heard across the city for more than two hours, as the fighting sent residents and shoppers scrambling for cover. During the operation, more than a dozen jeeps drove through streets, as an army bulldozer pushed aside vegetable stands and cars.

The arrest raid came less than two week after Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas held a rare summit, and pledged to try to improve the atmosphere. Palestinian negotiator Saeb Erekat said Thursday's raid violated the Israeli promise.

Israel and the Palestinians agreed to a shaky cease-fire in the Gaza Strip in late November, but occasional fighting has continued in the West Bank. Abbas has called for expanding the cease-fire to the West Bank, and Israeli officials said they were hopeful for a broader truce, but Gaza militants first had to stop firing rockets into Israel.

The army said it was conducting a routine arrest raid in Ramallah on Thursday.

A Palestinian security official, speaking on condition of anonymity because he was not authorized to talk to the media, said Israeli forces had entered Ramallah's open-air vegetable market to arrest militants from the Al Aqsa Martyrs' Brigades, a group affiliated with Abbas' Fatah Party.

When the Israeli troops became trapped, the army sent in more forces to extricate them, the Palestinian official said.

During the raid, bulldozers and armored personnel carriers were seen driving through Ramallah's central square, clearing cars out of the way and turning some over on the pavement.

The army fired smoke grenades, and at one point, an Israeli helicopter fired. The army said the helicopter fired deterrent fire in open areas.

The Arab satellite station Al Jazeera showed footage of a man waving a white flag over his head

Men on rooftops threw objects at a bulldozer and children eventually emerged from the buildings and pelted the bulldozers with rocks.