Palestinian gunmen killed an Israeli settler and exchanged fire with troops in the West Bank on Friday, while Israel's prime minister suggested that Washington link U.S. aid to Palestinians to a crackdown on armed groups.

Israeli soldiers kept up their hunt for militants, smashing through the walls of houses in Nablus and uprooting orchards in the Gaza Strip apparently used to launch rockets at the Israeli city of Ashkelon.

Hours earlier, an Israeli helicopter in southern Gaza killed a Hamas fugitive driving a donkey cart, the fourth missile strike against members of the Islamic militant group in eight days.

Israel marked all Hamas members for death after 21 people were killed in an Aug. 19 bus bombing in Jerusalem. Israel says the Palestinian Authority is sabotaging the U.S.-backed "road map" peace plan by failing to curb the militants.

Israeli Prime Minister Ariel Sharon told visiting U.S. congressmen that the United States could help by exerting economic pressure on the Palestinians, a senior official in Sharon's office said Friday.

At a meeting Thursday with Republicans Thomas Reynolds of New York and Eric Cantor of Virginia, Sharon suggested tying financial aid to progress on shutting down the armed groups, according to the official, who spoke on condition of anonymity.

The Palestinians are to receive $200 million in U.S. aid in 2003, distributed through Washington's foreign aid agency, USAID.

The money is allocated for specific development and relief programs, such as improving water supplies. The U.S. government also made a special payment of $20 million to the Palestinian Authority earlier this year after Yasser Arafat agreed reluctantly to appoint a new prime minister, Mahmoud Abbas, who backs the peace plan.

Palestinian Labor Minister Ghassan Khatib said any reduction in aid would only make Abbas' task even more difficult, by creating "fertile ground for the extremist groups."

"Our experience shows that the more economic hardship you see the more you see extremism," he said. "It would definitely backfire."

The cash-strapped Palestinian Authority has run down welfare programs during the last three years of fighting. Islamic charities, some suspected of links to Hamas, have increasingly stepped into the breach.

Only Thursday, Israel welcomed the Palestinian Authority's decision to freeze 39 bank accounts of nine charities to investigate whether they channel money to armed groups.

Hamas has denounced the bank freeze, saying it will only hurt poor Palestinians, and threatened revenge for Israeli missile attacks.

Friday's shooting was claimed by another militant group, the Al Aqsa Martyrs' Brigades, which is loosely affiliated with Arafat's Fatah faction.

Al Aqsa gunmen killed settler Shalom Har-Melech, and seriously wounded his pregnant 24-year-old wife, Limor, causing their vehicle to turn over near the West Bank city of Ramallah.

With doctors concerned the fetus could be harmed, she later gave birth by Caesarean section to a healthy daughter, hospital officials said. Surgeons then operated on her injuries.

Palestinian gunmen have repeatedly targeted Jewish settlers traveling on West Bank roadways.

Israeli Foreign Minister Silvan Shalom said the latest incident shows that "the Palestinians even now are not willing to do anything to put an end to the terrorism here in our region."

In the West Bank town of Jenin, Palestinian gunmen fired on Israeli soldiers manning a lookout in a four-story office building, setting off intense gunbattles, residents said.

Eight tanks and armored vehicles moved in and drove back the gunmen with tank-mounted machine guns before picking up the soldiers from the lookout and moving out of the town, witnesses said. No injuries were reported.

Also Friday, troops combed the Balata refugee camp on the edge of Nablus, part of a weeklong arrest sweep in the West Bank's largest city.

Swinging sledgehammers, troops broke through walls to move from house to house, a technique used to cut down on soldiers' exposure to possible gunfire. Balata is a stronghold of armed groups.

In their search for militants, soldiers caused considerable damage to several homes, demolishing walls, overturning furniture and breaking household goods, such as tea cups, residents said.

In the Gaza Strip, meanwhile, Israeli bulldozers uprooted brush and orchards in Palestinian-controlled areas near the town of Beit Hanoun to deprive those launching rockets of cover, the army and witnesses said.

In the past week, Hamas fired more than a dozen Qassam rockets at Israeli targets, including one that landed Thursday in an industrial zone just south of Ashkelon, the deepest hit yet. The rockets, with a range of up to six miles, have caused little damage or injury, but Israel considers them a strategic threat.

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