Prime Minister Ariel Sharon?s Likud party and opposition Labour haggled over power-sharing on Sunday in a coalition deal crucial for pushing through an Israeli withdrawal from the occupied Gaza Strip. Violence flared again in Gaza as Israeli troops pulled back from a two-day raid on a militant stronghold that killed 11 Palestinians. Fighters fired barrages of rockets into Israel and the army retaliated with missile strikes. But US President George W. Bush said in an Israeli newspaper interview he was sure next year would bring peace.

Talks on an Israeli unity government that began on Saturday had stumbled over Labour leader Shimon Peres? demand to be deputy prime minister in a future government ? a post already filled by Sharon loyalist Ehud Olmert ? political sources said. ?The prime minister has rejected outright any possibility of one acting prime minister not being from Likud,? Olmert told Army Radio. Labour officials insisted the post could be shared and the coalition deal may be clinched later on Sunday.

Peres, an 81-year-old Nobel Peace Prize winner who served under a Sharon-led unity cabinet in 2001, had said Labour should join the coalition unconditionally to promote the prime minister?s plan to quit Gaza and parts of the West Bank. Joining forces with centre-left Labour could also help restart stalled talks with Palestinians and win Sharon a reprieve from snap elections, a serious threat since he fired rebellious coalition partners in June.

Bloodshed

Most Israelis support the plan to uproot Jewish settlements from Gaza and a small chunk of the West Bank next year. But while Western countries hail it as a possible step towards peace after Yasser Arafat?s death, Palestinians fear Israel will use the withdrawal as a way to strengthen its hold on most of the West Bank. Continuing violence, especially in Gaza, has knocked hopes of a breakthrough on ending a 4-year-old uprising and decades of conflict.

Palestinians searched through the rubble of demolished buildings in the Khan Younis refugee camp on Sunday after the army pulled back from a raid it said was intended to stop mortar fire at nearby Jewish settlements.

?I do not think peace is possible with the Israelis,? said Yasser Abu Al-Arraj, 31, sitting with his six children on the ruins of their former home. Palestinian leader Mahmoud Abbas condemned the raid, saying Israel was trying to disrupt a Jan. 9 election to choose a successor to Arafat.

Abbas is clear favourite to win the poll, but militants have ignored his call to end their armed struggle. The Islamic Hamas group fired several makeshift rockets at an Israeli border town, drawing Israeli missiles in response. Sharon said last week he saw a unique chance for peace with new Palestinian leaders and was ready to coordinate some aspects of the Gaza plan as a step to a broader deal.

Criticising Sharon for wanting to keep major West Bank settlements, Abbas said he would only negotiate with Israel for a Palestinian state on all of the West Bank, Gaza Strip and East Jerusalem, captured by Israel in the 1967 Middle East war. Bush told leading Israeli daily Yedioth Aharonoth that he was sure he would bring peace between Israel and the Palestinians before the end of his term.

?Next year is very important, as it will bring peace. Sharon understood this. It is very important that the Palestinians also understand that peace is not something that is arrived at through words, but through deeds,? Bush said. In a sign of goodwill ahead of the Palestinian election and as a gesture to Egypt for freeing a convicted Israeli spy, Israel agreed on Sunday to free 170 Palestinian prisoners ? most members of Abbas and Arafat?s dominant Fatah movement.

Dan WILLIAMS