HIGHLIGHTS: New Proposal Soft on Refugees 'Right of Return'; Yields Sovereignty to Israel Over Jewish Quarters in East Jerusalem & Limits Future Palestinian State's Possession of Weapons||Two Palestinians Killed in Israel's Targeted Assassinations & Rolling Raids in Palestinian Territory||Bush Suspends Building American Embassy in Jerusalem||Palestinians Continue Targeting Settlers and Settlements||Occupation Army Taking Precautions Against Possible Chemical Attacks|| STORY: Press reports say that the Palestinians have been trying to muster U.S. good will with a proposed outline for a state living in peace with Israel.

The proposal, obtained Monday by The Associated Press, appears to soften the Palestinian demand that all 1949 war refugees and their descendants have the right to return to Israel, and for the first time proposes Israeli sovereignty over part of Jerusalem's Old City.

Palestinian Cabinet Minister Nabil Shaath, Palestinian officials said, speaking on condition of anonymity, delivered the outline to U.S. Secretary of State Colin Powell in Washington last week.

The proposal among other things addresses the divisive issue of Jerusalem by offering Israel sovereignty over the Jewish Quarter of the Old City and part of the Western Wall, the holiest site in Judaism. That would leave the contentious hilltop above the wall, holy to both sides, in Palestinian hands.

The proposal also said a Palestinian state would agree to limit its possession of weapons - a key Israeli demand - and that Palestine and Israel would agree not to participate in any military alliance against each other.

BUSH SUSPENDS BUILDING EMBASSY IN JERUSALEM AS HE POLISHES PALESTINIAN PROPOSAL

Meanwhile, President Bush on Monday put the finishing touches on a proposal for a provisional Palestinian state covering parts of the West Bank.

He intends to set out a sequence of steps that would require democratic reform within the Palestinian leadership in order to achieve statehood, said a senior U.S. official, speaking on condition of anonymity.

Bush's deliberations, after a weekend at his ranch in Crawford, Texas, follow a series of meetings with Arab and Israeli leaders

Some of the president's advisers have suggested he set a timeline or a series of developments that would advance the right to a state Bush declared in early April.

Evidently, Bush will not mention Jerusalem's future in his speech, thereby possibly skirting the most sensitive issue to Jews and Muslims.

On Monday, Bush again suspended building of a U.S. Embassy in Jerusalem. When he campaigned for president, he said he would move the embassy from Tel Aviv to Jerusalem, thereby acknowledging Israel's claim that the city is its capital.


TWO PALESTINIANS KILLED-ONE IN AL KHADER, THE OTHER NEAR RAMALLAH

In El Khader, a village near Bethlehem, Israeli occupation soldiers shot and killed Walid Sbeh, a member of the Al Aqsa Martyrs Brigades militia, witnesses and Israeli occupation army sources said. The sources, speaking on condition of anonymity, said Sbeh organized bomb attacks in Israel.

Later, Palestinian security officials said some Israeli tanks and jeeps moved into El Khader.

Near Ramallah, Israeli occupation soldiers shot and killed a Palestinian who was pushing a cart, Palestinians said. Another man was wounded.

Also, Palestinian witnesses said Israeli tanks and jeeps surrounded the house of Hamas fugitive Raed Ifrahat at the entrance to Yamoun village near Jenin. Ifrahat was not there and the occupation soldiers left after firing tank shells.

PALESTINIANS CONTINUE TARGETING SETTLERS AND SETTLEMENTS

A mortar shell fired by Palestinians hit a residence in the southern Gaza Strip internationally illegal settlement of Neveh Dekelim Tuesday. There was no injury in the shelling, however, the house reportedly sustained some damage in the attack.
A booby-trapped vehicle exploded Monday the village of Z'bubeh near Jenin in the northern West bank.

The driver of the truck, fled on foot when occupation troops ordered him to stop for inspection.

The explosives-laden vehicle then blew up. There were no injuries among the occupation troops.

Also Monday, Palestinians detonated an explosive device near an Israeli Border Police unit in the village of Hawara, south of Nablus. One Israeli policeman sustained minor wounds in the explosion. Elsewhere, shooting was reported near the internationally illegal settlement of northern Samaria of Neveh Tzuf. There wer no reports of injury in the attack.

In Jerusalem and Haifa Israeli police returned to the highest state of alert Sunday night, following intelligence warnings of an impending attack in either or both cities.

Tallal Kalulah, a Palestinian from a village in the Jenin area was arrested Mondayon suspicion of stabbing an occupation soldier in the neck in Haifa's Hadar district last July and trying to snatch his rifle.

Late Monday night, Palestinian Resistance men lightly wounded two occupation soldiers as shots were fired at them at the occupation army's encampment in Yad Yair near Ramallah.

At the same time, responding to reports that Hamas intends to launch a wave of chemical bomb attacks, Defense Minister Binyamin Ben-Eliezer said Monday that the occupation army has been preparing. Alerts for what is called "mega terror" exists. The occupation army is investing extensive efforts and large budgets in preparations, according to the minister.

PHOTO CAPTION

Palestinian leader Yasser Arafat , right, meets with Sheikh Tamem All Hamad, Qatari Youth and Sports Minister, left, during their meeting at Arafat's office in the West Bank town of Ramallah Monday June 17, 2002. All Hamad arrived to Ramallah to pay his respect for Mazen Abbas, son of senior Palestinian official Mahmoud Abbas, who died on Friday in Qatar of a heart attack. (AP Photo/Palestinian Authority, Omer Rashedi, HO)