Israel said Sunday that it would let Palestinian gunmen leave Bethlehem's Church of the Nativity unharmed if they agree to face trial in Israel or accept permanent exile.

A Palestinian policeman inside the church denounced the latest proposal to end the two-week standoff at the church, which is ringed by Israeli tanks, armored personal carriers and snipers.

"We will never accept being refugees in another country or surrendering to the Israelis," said Mazan Hussein, one of about 200 armed Palestinians inside. "Our options are to die or to return safely to our homes."

Hussein said the Palestinians in the church -- built on the site where tradition holds that Jesus was born -- would abide by any decision made by Palestinian leader Yasser Arafat.

Israeli Prime Minister Ariel Sharon raised the proposal with Secretary of State Colin Powell, who was to pass it on to the Palestinian leadership, said Sharon spokesman Raanan Gissin.

"We want to resolve the standoff at the Church of the Nativity, but we're not going to let the terrorists just walk away," Gissin said.

Palestinian gunmen shot off the church door and entered on April 1 as they were being pursued by Israeli forces chasing suspected Palestinian militants. About 250 people are inside the church, including gunmen, Palestinian policemen and clergy.

For the second straight Sunday, no services were held at the church due to the standoff. Israeli tanks and armored personnel carriers surround the compound, with snipers in place and a surveillance blimps with cameras providing a view of the grounds below.

On Saturday night, Israeli soldiers played the sound of screaming sirens from a large speaker placed on a truck just outside the church.

Israel's proposal came after a Palestinian was fatally shot Saturday in an adjoining hostel.

Israeli soldiers briefly entered the hostel in the church compound and fired several shots, hitting Hassan Nasmam in the neck and killing him, said a Palestinian policeman who identified himself as Abu Marwan.

Christian leaders who met with Powell on Saturday proposed that Israeli troops leave Bethlehem for three days and allow the Palestinians inside the holy site to put down their weapons and go home. Israel rejected the proposal.

The armed Palestinians in the compound urged Powell to intervene in the standoff, and also have sought help from U.N. Secretary-General Kofi Annan and Pope John Paul II.

The pope, addressing faithful gathered in St. Peter's Square on Sunday, said he was entrusting to God "those suffering in the Holy Land, from where appeals from all sides are reaching me."

He made no specific mention of the standoff at the church, which comes amid a major Israeli offensive to root out militants in the West Bank. Bethlehem is in the West Bank just south of Jerusalem.