Israel says it is ready to pull its troops out of Bethlehem in the West Bank Sunday, if Palestinians halt their gunfire.
The withdrawal was meant to begin Saturday but was suspended after Israeli soldiers came under fire from Palestinian gunmen.
Israeli Defense Minister, Binyamin Ben-Eliezer, says the Israeli army will leave Bethlehem and neighboring Beit Jala Sunday if Palestinians do not resume their firing in the area.
He was speaking after a lull in fighting was reported in both towns, following fierce gun-battles that began on Saturday and continued until the early hours of Sunday morning.
On Saturday, Israeli Prime Minister Ariel Sharon suspended the withdrawal, blaming the Palestinian leadership for failing to end shooting attacks against Israelis.
He is demanding quiet as a pre-condition for pulling troops out of the area.
Israel's Transport Minister, Ephraim Sneh, a former military commander, defended the decision.
He says Israel is trying to pave the way for Palestinian security forces to maintain law and order in their areas.
The withdrawal from Bethlehem and Beit Jala is meant to be a test-case for a wider pull-back of Israeli troops from six Palestinian ruled cities in the West Bank.
Israel re-occupied the areas following the assassination earlier this month of right-wing Israeli Cabinet Minister, Rehavam Ze'evi by a radical Palestinian group.
Meanwhile, Israeli Foreign Minister, Shimon Peres, says Palestinian leader Yasser Arafat is losing his ability to implement a cease-fire by halting attacks by Palestinian militants.
Mr. Peres says Mr. Arafat does not have control over at least three Palestinian militant groups, which are determined to continue launching attacks against Israel.