Israel rejects demands, talks on soldier faltering

GAZA - Israel has rejected demands from Gaza Strip gunmen who abducted an Israeli soldier to free 1000 Palestinian prisoners from its jails as Egyptian-led mediation efforts to free the captive appeared to founder.

A Palestinian official said mediators had reported the soldier was alive and stable after being treated for wounds.

With Israel having sent troops and tanks into southern Gaza and threatening to broaden the offensive unless Corporal Gilad Shalit is freed, moderate Palestinian President Mahmoud Abbas has been in around-the-clock talks with the Hamas government.

Israeli troops and Hamas gunmen clashed inside southern Gaza in one of the worst exchanges of fire since the assault to free Shalit began, but there were no immediate reports of casualties.

"Prime Minister Ehud Olmert has reiterated that there will be no deals, that either Shalit will be released or we will act to bring about his release," Israeli Foreign Ministry spokesman Mark Regev said, responding to the fresh demands.

Shalit's seizure in a raid across Gaza's frontier last Sunday sparked a crisis that has pushed Israeli-Palestinian ties to new lows and dashed any chance peace talks might be revived.

A statement from the militants did not specify that freeing the 1000 "Palestinian, Arab and Muslim prisoners" and ending Israel's Gaza assault would be in exchange for Shalit's freedom.

But a spokesman for the Hamas armed wing, one of the three groups that captured Shalit, said that was what it meant.

The government of the Hamas Islamists, already straining under a US-led economic embargo to get it to recognise Israel, has said it had no prior knowledge of the militants' raid.

While militants have not said if Shalit was dead or alive, a Palestinian official said mediators had said he was fine.

The United Nations said its Middle East special envoy, Alvero de Soto, would go to Gaza on Sunday for talks with Abbas.

Abbas voiced hope for a negotiated solution in which Shalit would be freed and at least some Palestinian demands met.

"Things are not deadlocked," he told reporters.

"People are looking for a satisfactory solution and hopefully we will get that solution."

Israeli tanks entered the southern Gaza Strip this week in the biggest push into the territory since Israel pulled out troops and settlers last year after 38 years of occupation.

Aircraft fired missiles on Saturday at training camps and access routes used by militants to fire rockets at Israel.

Diplomats had said Israel wanted to give the Egyptian-led mediation efforts more of a chance before broadening its operations, expected with a push into northern Gaza.

But talks were foundering partly because the militants were insisting on prisoners being freed in return for the 19-year-old tank gunner, the diplomats and Palestinian officials said.

One Hamas leader said the militants had rejected an Egyptian proposal that Israel free a group of prisoners because it gave no number or timeframe.

Diplomats said Egypt was trying to get Syria to lean on Damascus-based Hamas leaders with greater sway over the armed wing than political leaders based in Gaza.

Israel has said it was playing no part in the mediation.

Its air strikes have targeted roads, bridges, power plants and areas used to fire rockets. Two militants have died and many Palestinians are complaining of a looming humanitarian crisis.

Piling on further pressure, Israel has detained dozens of Hamas cabinet ministers and lawmakers in the West Bank.

- REUTERS