Israeli troops moved out of a Palestinian refugee camp in southern Gaza on Saturday night, the army said, ending a two-day raid that killed 11 Palestinians and wounded dozens, the largest Israeli military operation since Yasser Arafat's (search) death last month.

The raid in Khan Younis (search) was launched Friday in response to Palestinian mortar and rocket attacks over the past week. Israel had said it would refrain from major offensives in the run-up to the Jan. 9 Palestinian elections, but would take action if attacked.

Meanwhile, Israeli Prime Minister Ariel Sharon's (search) Likud Party and the opposition Labor Party worked to finalize their pact to form a coalition government amid reports the new Cabinet — which Sharon seeks to bolster his government as he carries out a planned Gaza withdrawal — could be sworn in as early as Thursday.

Residents of Khan Younis said they saw 10 Israeli tanks pulling out of the area Saturday evening. Palestinian security confirmed the troops had left.

In the Khan Younis fighting Saturday, two militants were killed by Israeli tank fire in separate incidents, Palestinian hospital officials said. The body of a third Palestinian shot in the head was recovered Saturday morning, medical officials said. It was unclear whether he was a militant.

A total of 11 Palestinians, including at least seven militants, were killed and 43 others wounded, since Israeli tanks and bulldozers entered the camp Friday. A Palestinian ambulance driver and five children under the age of 16 were among the wounded. One Israeli soldier also was wounded.

Hundreds of residents who had evacuated their homes began returning to the camp even though the area was engulfed in complete darkness because the electric grid had been damaged in the operation. Some residents found their homes demolished or damaged but officials said it was not immediately clear how many.

The raid was in response to more than 50 mortar and rocket attacks launched by Palestinians over the past week which killed a Thai worker in a Jewish settlement and injured 17 other people, including 11 soldiers, the army said.

The army said some houses used by militants to launch mortars or rockets were targeted in the operation.

On Saturday, Palestinian militants in northern Gaza launched three homemade rockets, two of which landed in Israel but caused no injuries or damage, the army said.

Under the Likud-Labor coalition plan, Labor leader Shimon Peres would become deputy prime minister. Israeli media reported Saturday that the two sides planned to sign the accord Sunday and the new ministers would be sworn in Thursday.

Sharon has sought to bring Labor and at least one religious party into his minority government to give him a majority to push through his plan to withdraw from the Gaza Strip and four West Bank settlements next year.

Under the plan, Labor Party leader Shimon Peres would become deputy prime minister and seven other Labor lawmakers would join the Cabinet. Israeli media reported Saturday that Labor and Likud officials planned to sign the new agreement Sunday

Sharon's withdrawal plan, coupled with the Yasser Arafat's death last month, has created new optimism for regional peace efforts. Both Palestinian and Israeli officials have expressed hope for restarting negotiations after Jan. 9 Palestinian elections.

In an interview in the German weekly Der Spiegel, Egyptian President Hosni Mubarak called Sharon "the only one in Israel who can take the courageous step toward peace."

"The contacts that we had with Sharon over recent weeks showed that he wants to move," Mubarak told the magazine in an interview released Saturday.

Mubarak also expressed hope for new U.S. peace efforts to resolve the conflict and said he believed a Palestinian state could be established by 2008.

Also Saturday, the Islamic militant group Hamas marked its 17th anniversary with a march through the streets of the West Bank city of Nablus by thousands of supporters — some carrying flags and pictures of Hamas leaders killed in fighting with Israel.

Dozens of gunmen and several hundred Hamas members in military fatigues burned a life-sized cardboard replica of an Israeli tank as the crowd cheered.

"Hamas will continue to resist with arms until Palestine is liberated from the Jordan River to the Mediterranean Sea," said Hamas spokesman Ahmad Hajj Ali, adding that Hamas will not yield to demands by the Palestinian leadership to stop attacks against Israel.

"We warn anyone who tries to disarm the resistance movements because Israel only understand the language of war," he said.