Shortly afterward, Israel's Defence Minister Shaul Mofaz ordered his troops to prepare for a new outbreak of violence.
Four hours of talks between Mofaz and Palestinian security chief Mohammed Dahlan broke up in the early hours with the Palestinian side rejecting an Israeli offer to withdraw from the towns of Jericho and Qalqilya.
Dahlan: rejected offer
The Palestinians are determined that the next Israeli withdrawal be from Ramallah, home of their leader Yassir Arafat, and regard the offer of a withdrawal from Jericho as little more than a joke as Israeli troops have long been absent from the sleepy town.
One member of the Palestinian negotiating team said there "had been no substantial progress on this issue.
"The Israeli side offered to withdraw from Jericho and Qalqilya. We didn't say we don't want these but we asked for them to withdraw from two main cities -- Ramallah and Hebron," the official told Agence France Presse.
"We want a time schedule for the complete withdrawal from all cities and towns to pre-intifada lines. This is the only way to implement the roadmap."
-Palestinian negotiator Saeb Erakat
"There was an agreement before (Palestinian prime minister Mahmud Abbas and Israeli counterpart Ariel Sharon visited) Washington to withdraw from two main cities - like Ramallah and Qalqilya or Nablus. But Israeli forces never entered Jericho."
The Palestinians' former chief negotiator, Saeb Erakat, also dismissed the Jericho offer.
"We want a time schedule for the complete withdrawal from all cities and towns to pre-intifada lines. This is the only way to implement the roadmap," added Erakat who remains a member of the Palestinians' negotiating committee.
Israel has been reluctant to bow to demands for pullouts from areas like Ramallah, accusing the Palestinians of failing to crack down on militant groups such as Hamas and Islamic Jihad which are currently observing a three-month ceasefire.
Irael braces for new attacks
Mofaz announced he had instructed the Israeli army to prepare for a resumption of attacks by Palestinian militant groups amid growing pessimism over the peace process.
The defence minister warned that "terrorism" would resurface if Abbas' government did not move to "dismantle the terrorist organisations".
He also told army radio the security situation was in danger of becoming "worse than before Aqaba", in reference to the June 4 summit in Jordan when the roadmap for peace was launched in the presence of US President George W. Bush.
Foreign Minister Silvan Shalom also charged that "the terrorist organisations are exploiting the calm now to rebuild their infrastructure (and) to obtain illegal arms from abroad".
The stalemate over army withdrawals is yet another obstacle to progress in the peace process, with the two sides seemingly as far apart as ever after Sharon and Abbas' trips to Washington over the past week.
The Palestinians have been particularly angered by the construction of a security wall across the West Bank, a project which Sharon insisted would continue despite previous criticism from Bush.
Around 200 local and foreign activists staged a protest against the barrier around Qalqilya early Thursday, hurling paint-filled balloons at the concrete wall and daubing slogans such as "Tear Down the Wall" and "Free Palestine".
Sharon arrived home Thursday morning, after a trip during which fears of pressure from the Bush administration over issues such as the barrier failed to materialise.
"The connection with the US is very deep but concerns about heavy pressure (being put on us) didn't happen - I didn't think it would," said one official travelling with Sharon.