RAMALLAH, West Bank - Israeli troops and Palestinian gunmen exchanged heavy fire in downtown Ramallah on Thursday after undercover Israeli forces tried to arrest fugitives in the city's vegetable market. Two Palestinians were killed and 25 were wounded.

Separately, a new round of factional fighting broke out between the rival Hamas and Fatah groups in the Gaza Strip, leaving two Palestinians dead.

Assailants also targeted three senior Hamas officials in the West Bank, kidnapping one, torching the car of a second and shooting in the air as a third emerged from a mosque, security officials said Thursday.

The Israeli arrest raid came as Israeli Prime Minister Ehud Olmert was meeting with Egyptian President Hosni Mubarak in the Red Sea resort of Sharm el-Sheik, Egypt, to find ways to restart Mideast peace talks that have been stalled for more than six years.

Israeli media reported that Mubarak would propose a regional peace summit involving Israel, the Palestinians, Egypt and Jordan, but Olmert's aides said they were unaware of such a proposal.

Israel and the Palestinians agreed to a shaky cease-fire in the Gaza Strip in November, but occasional fighting has continued in the West Bank. Palestinian President Mahmoud Abbas has called for expanding the cease-fire to the West Bank, and Israeli officials said they were hopeful for a broader truce, but Gaza militants first had to stop firing rockets into Israel.

Palestinian negotiator Saeb Erekat said Thursday's raid violated a promise Olmert made in a rare summit with Abbas last month to work toward improving relations between the two sides.

The fighting began when Israeli forces entered the open-air vegetable market in Ramallah to arrest militants from the Al Aqsa Martyrs' Brigades, a group affiliated with Abbas' Fatah party, a Palestinian security official said on condition of anonymity because he wasn't authorized to speak to the media.

When the Israeli troops became trapped, the army sent in more forces to extricate them, the Palestinian official said.

Bursts of gunfire, loud booms and sirens could be heard across Ramallah for more than two hours, as fighting between Israeli forces and Palestinian militants sent residents and shoppers scrambling for cover. Bulldozers and armored personnel carriers were seen driving through Ramallah's central square, clearing cars out of the way and turning some over on the pavement.

The army also fired smoke grenades, and at one point, an Israeli helicopter opened fire. The army said the helicopter fire was directed toward an open area as a deterrent.

In the Gaza violence, a member of a Hamas security force was killed Thursday when his car came under fire from unidentified assailants in the Jebaliaya refugee camp, a security official said. Hamas accused Fatah of the attack, but Fatah denied involvement.

In nearby Beit Lahiya, Hamas gunmen surrounded the house of a Fatah-linked security commander and exchanged fire with guards, leaving a Fatah member dead and 14 other people wounded, witnesses and security officials said.

Clashes also erupted Thursday during the funeral for three Fatah loyalists killed in gunbattles with Hamas on Wednesday, wounding five people.

Persistent clashes between Hamas and Fatah began in Gaza a month ago, the result of the intensifying power struggle between the two groups for control of the Palestinian territories. Both sides have hardened their positions, dooming truce attempts to quick failure.

In response to the renewed fighting, Prime Minister Ismail Haniyeh of Hamas cut short a tour of Arab nations and returned to Gaza on Thursday. His next stop was to have been Jordan, which has offered to host a meeting between Haniyeh and Abbas, in an attempt to defuse tensions between the political rivals. With Haniyeh returning to Gaza, it's unlikely they'll meet soon.

In recent weeks, talks on a forming a coalition government between Hamas and the more moderate Fatah have broken down and Abbas has threatened to call early elections. But he may not have enough clout to go through with the plan, denounced by the Hamas-led government as a coup attempt.

Three incidents in the West Bank made the security situation between the Palestinian groups even more tense.

Late Wednesday, gunmen stormed the home of Deputy Health Minister Bashar Karmi of Hamas in the West Bank town of El Bireh and forced him into their car at gunpoint.

Karmi told The Associated Press that the kidnappers placed a hood over his head, handcuffed him and moved him from one location to another, before releasing him five hours later. The kidnappers warned him that if the fighting continues in Gaza, it will spread to the West Bank, he said.

In the West Bank town of Jenin, assailants torched the car of Prisoner Affairs Minister Wasfi Kabaha of Hamas. It was the third attack on a car owned by Kabaha.

In the village of Jabaa, gunmen fired in the air as the local prayer leader and senior Hamas activist, Nasser Al Awna, emerged from the mosque. He was not harmed.

Jamal Tirawi, a Fatah lawmaker, warned that Hamas leaders in the West Bank could be targeted again.

"If Hamas keeps doing what it is doing with its militia in Gaza, and is killing our members, all Hamas leaders in the West Bank are in our hands," said Tirawi, a former member of the Al Aqsa Martyrs' Brigades.

Hamas warned in a statement on its website that "those in Fatah who are plotting a coup are trying to escalate tension in the Palestinian street" and warned of any attempt to harm Hamas government officials.