Palestinian and Israeli security officials have reached an agreement for a cease-fire and a possible Israeli troop withdrawal from the West Bank town of Beit Jala.
Officials say Palestinian leader Yasser Arafat ordered gunmen in Beit Jala to stop firing on the adjacent Jewish community of Gilo.
Palestinians say Israeli forces could withdraw from Beit Jala within hours if calm is restored and the cease-fire holds.
Israeli government spokesman Raanan Gissen said such an understanding has been reached, but declined to release any further details. "We have not started this round of shooting," he said. "We are the ones who are interested, I hope with the Palestinians too, to stop it and to bring about a cessation of shooting on Jerusalem from any direction. Therefore, we welcome this understanding. We hope it will hold. But I am saying the test will be on the ground."
Israel has been under strong pressure from the United States and other countries to withdraw from Beit Jala.
Israeli tanks and troops raided the town earlier this week after Palestinian gunmen fired on Gilo.
There was heavy fighting in Beit Jala earlier Wednesday and in a nearby refugee camp.
Palestinian militants continued to fire mortar shells on Gilo although no injuries were reported.
Gilo, which is next to Jerusalem, was built on disputed land captured by Israel in the 1967 Middle East war.
Earlier, at least three Palestinians and one Israeli were killed in continuing clashes in the West Bank and Gaza Strip.
Israeli tanks and troops moved into the Rafah area in southern Gaza killing one Palestinian and destroying police posts.
Another Palestinian was killed when shots were fired at his car on a West Bank road near Jerusalem. Police are investigating reports that Israelis carried out the ambush.
Near the West Bank town of Tulkarem a Palestinian man identified as a farmer was killed by Israeli troops.
An Israeli truck driver was shot and killed near the West Bank town of Nablus.
More than 750 people, mostly Palestinians, have been killed since the uprising against Israeli occupation began last September.