Israeli soldiers killed three Palestinians in Gaza, including a child, the military and residents said. In rare agreement, Israel and Palestinians said a U.S. penalty against Israel over a security fence in the West Bank was cosmetic.

Two of the Palestinians were killed late Wednesday while apparently planning to set up an ambush on a road used by Jewish settlers, Israeli military sources said. A third Palestinian was wounded. The army said at least two of the Palestinians were members of the militant Islamic Jihad group.

Israeli soldiers in a watch tower fired at a Palestinian neighborhood of the southern Gaza town of Rafah, killing a 9-year-old boy playing in front of his house, Palestinians said. The military said it knew of no gunfire incidents in the area.

Israeli analysts agreed with Palestinians that the U.S. deduction of $289.5 from loan guarantees was a wrist slap and would cost Israel little and not stop construction of the barrier the Palestinians say would take away significant portions of their land in the West Bank.

"This is only diplomatic finger wagging," said Udi Segal, diplomatic correspondent for Israel's Channel 2 TV.

"I'm afraid that this step, as a message, will not deter Israel," Palestinian Cabinet Minister Saeb Erekat said.

The reduction comes from $9 billion in loan guarantees pledged to Israel by the United States over three years. According to U.S. law, money spent by the Israeli government for settlements and related items in the West Bank and Gaza Strip must be deducted.

In Washington, State Department spokesman Richard Boucher refused to say how much of the $289.5 million deduction applied to the security barrier.

However, the real penalty is much less than $289.5 million. Instead, it is only the difference between interest rates on loans.

The loan guarantees allow Israel to borrow money at rates between 1 and 2 percent lower than its usual rate, Finance Ministry spokesman Eli Yosef said.

With the higher rates, Israel would pay an extra $5.8 million in interest annually over the life of the loan, usually between two and five years — a minuscule amount for an economy that produces upward of $100 billion a year.

The deduction "is a fairly painless rap on the knuckles," said Israeli political commentator Yossi Alpher, influenced by the upcoming U.S presidential campaign.

Foreign Minister Silvan Shalom said Israel will not stop construction of the complex of walls, trenches and fences, which is to slice deep into the West Bank to incorporate Jewish settlements.

"We are determined to continue building this fence. This fence saves lives. This fence has already proven itself," Shalom said.

A U.N. report said the barrier would carve out 14.5 percent of the West Bank, trap at least 274,000 Palestinians between the fence and Israel and cut hundreds of thousands of others off from their land.

Israel insists the barrier is necessary to keep Palestinian suicide bombers and other attackers out of their country.

The United States does not object to the fence itself but rather its cutting into the West Bank. Palestinians say the barrier is a huge grab of land they want for a state.

"We want steps from the Americans that will definitely stop the settlements and the wall to give peace a chance," Erekat said.

Also Wednesday, U.S. officials invited the Israeli and Palestinians behind one alternative peace plan to meet with Secretary of State Colin Powell (news - web sites) on Dec. 12. Powell was also setting up a meeting with negotiators of another informal document, the Geneva accord, organizers said.

Both plans calls for the creation of a Palestinian state in nearly all the West Bank and Gaza. Palestinians refugees would then give up their demand to return to homes lost in Israel during the 1948 Mideast war.

Powell's encouragement of the plans came as U.S. officials worked to restart the stalled "road map" blueprint, which envisions an immediate end to violence and creation of a Palestinian state by 2005.

In their own efforts to further the road map, Palestinian officials said they plan to secure a pledge from militant groups meeting in Egypt next week to halt all attacks against Israel. The cease-fire will then be presented to Israel along with the demand for full implementation of the road map, Erekat said.

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