Israeli police spokesman Micky Rosenfeld however said a general closure would be imposed on the West Bank and Gaza at midnight Thursday ahead of the Jewish holiday of Purim which ends Monday evening.
 
Under such a closure, Palestinians are banned from entering Israel, except for in a few humanitarian cases.
 
Districts raided
 
During the Israeli offensive in Nablus, troops raided the outlying al-Faraa refugee camp where they exchanged fire with three fighters holed up in a camp mosque, the Israeli and Palestinian officials said on Thursday.
 
The army said the three men opened fire at troops from inside the mosque, and that soldiers returned fire.
 
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The Israeli forces then regrouped around an apartment building in a newer neighbourhood, surrounding it with jeeps and armoured vehicles, using loudspeakers to demand the surrender of wanted men thought to be hiding in the building.
 
After civilians poured out, soldiers rushed through the entrance and explosions were heard inside, but it was not immediately clear whether armed men were holed up there.
 
The Israeli military says that 10 wanted fighters have been arrested since the operation began.
 
One Palestinian civilian has been killed.
 
The army, which says it has uncovered three explosives labs in the city this week, says most suicide bombers who have attacked over the past year came from Nablus, a stronghold of Palestine's many armed groups.
 
Israeli settler wounded
 
Also on Thursday, suspected Palestinian fighters shot and wounded an Israeli settler driving through the occupied West Bank, medical sources said.
 
The 55-year-old man from Tzofim settlement near the West Bank town of Qalqilya was "evacuated to hospital with light to moderate wounds", Yerucham Mandola, a Magen David Adom rescue services spokesman, said.
 
The Israeli army said it was searching for the assailants.
 
Israeli reservations
 
Meanwhile, Tzipi Livni, the Israeli foreign minister, has said Israel cannot accept an Arab peace initiative as it stands, according to an interview published in a Palestinian daily on Thursday.

Thousands are confined to their homes as Israel
strikes Nablus's "terrorist infrastructure" [AFP]
She told Al-Ayyam that Arab countries had introduced new clauses to the Saudi peace initiative on the fate of Palestinian refugees making it "impossible to accept in its current form".

Under the plan, adopted by the Arab League at a summit in 2002, the Arab world would normalise ties with Israel in exchange for a full withdrawal from Arab land occupied since 1967, finding a "just" solution to the Palestinian refugee problem and the establishment of a Palestinian state.

Livni said: "The idea of establishing full diplomatic relations between  Israel and the Arab countries is part of our ambitions ... I think we have a common objective and that our differences are lessening."

"The Saudi initiative was initially a positive sign but since the hardliners in Beirut added points going against a solution based on two states, it has become unacceptable to us in its current form."