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JERUSALEM (Reuters) - Israelis and Palestinians fought their worst clash in a year and Israel said it would not stop the building in occupied East Jerusalem that is blocking a relaunch of talks.
Israeli tanks advanced into the Gaza Strip on Friday after the fiercest clash with Palestinian fighters in 14 months killed at least two men on either side, on the borders of the enclave.
Resisting United States pressure in what media reports termed a bruising encounter with President Barack Obama in Washington this week, Prime Minister Benjamin Netanyahu said Israel would not stop building in East Jerusalem, although he vowed to find a way to relaunch stalled negotiations.
But a Friday meeting of his senior cabinet convened to discuss confidence-building steps ended with no announcement.
"Israeli construction policy in Jerusalem has remained the same for 42 years and isn't changing," said a written statement from Netanyahu's spokesman, Nir Hefez.
The impasse has triggered sporadic rocket attacks this month from the Gaza Strip, which Israel answered with airstrikes. But Friday's close-range firefight was the deadliest since Israel's all-out assault on the Islamist group 14 months ago.
The Israeli army said an officer and a conscript were killed when Palestinian gunmen fired on a military patrol inside the Gaza Stip. Two soldiers were wounded and two Palestinian fighters also died in that clash, it said.
Palestinian officials did not immediately confirm the two deaths but said at least five Palestinians, one a 10-year-old boy, were wounded, and one man of 23 died later of wounds, according to Gaza hospital officials.
"I think it's true to say that this is one of the fiercest days we have had since operation Cast Lead happened," Israeli army spokeswoman Avital Leibovich said.
It was a "tragic and a painful" incident in a zone where there is "an everyday war", she said.
Hamas Islamists and supporting militant groups oppose the peace-seeking policy of the dominant Palestinian group Fatah, which holds sway in the occupied West Bank and has played down calls for a new Palestinian uprising of violence against Israel.
Gaza sources said five Israeli tanks and two armored bulldozers advanced from the east firing shells near the town of Khan Younis, in the center of the narrow coastal enclave.
The militant group Popular Resistance Committees confirmed one of its fighters was critically wounded by shelling. Reports spoke of Israeli helicopters and unmanned drones in the skies.
The clash, however, was not overtly linked to the impasse between Israel, the Palestinians and Washington over Israeli settlement of occupied West Bank land and East Jerusalem.
Israel unilaterally withdrew from Gaza in 2005.
The militant Islamist group Hamas, which has ruled the enclave since 2007, said its men had fired "in defense" on Israeli soldiers who crossed into the Strip.
Hundreds of its supporters took to the streets of Jabalya refugee camp in the north to celebrate, led by senior Hamas lawmaker Mushir Al-Masri, who praised the battle.
"Entering Gaza is not a picnic," he said. "The Zionists cannot come in anytime they wish and leave anytime and however they want," Masri told the crowd. "The Qassam Brigades (Hamas's armed wing) were ready and taught them a lesson and they should not repeat such a foolish act."
Hamas has largely held its fire since the three-week war with Israel in early 2009 in which some 1,400 Palestinians, mainly civilians, and 13 Israelis, mainly soldiers, were killed.
But smaller factions have violated the de facto truce by firing rockets and mortars into neighboring Israeli territory.
Tensions have run high along Gaza's frontier this month, with Israel launching air strikes in response to Palestinian rocket attacks, one of which killed a Thai worker in a farm.
Four Palestinians have died in West Bank clashes with Israeli forces this month. Obama wants Israel to halt settlement in East Jerusalem, an issue that created new friction when a plan to build 1,600 more housing units was published as Vice President Joe Biden visited to urge talks.
But Friday's cabinet meeting adjourned without decisions.
"The prime minister set further discussion in the forum for the coming days, as well as continued contacts with the U.S. administration in order to reach an agreed path for getting the diplomatic process moving," his aide Hefez said.