Hopes for reviving a stalled Middle East peace plan were buoyed on Monday as Israel and the Palestinians held U.S.-brokered negotiations and militants prepared for a new round of cease-fire talks.

The new diplomatic initiatives moved forward despite fresh violence in the Gaza Strip, where Israeli forces raided a refugee camp and killed two unarmed Palestinians.

State Department official David Satterfield oversaw a meeting in Jerusalem on Monday between senior Israeli and Palestinian officials arranged after a weekend of intensive efforts to restart a stalled U.S.-backed peace "road map."

U.S. and Palestinian officials said the talks sought ways to ease a Palestinian economic crisis. But Israeli sources said they might also pave the way for a summit between Israeli Prime Minister Ariel Sharon and his Palestinian counterpart, Ahmed Qurie.

"...The good thing is that the two sides are talking," a Western diplomat said, adding that expectations for significant progress were low.

Egyptian mediators, meanwhile, planned new negotiations with militants on Tuesday after talks in Cairo on suspending attacks against Israel collapsed last week, Palestinian sources said. A truce is seen as crucial to reviving the road map.

The two-day talks, to be held in Gaza City, will involve Hamas, Islamic Jihad and other factions that have spearheaded a suicide bombing campaign during a three-year-old uprising.

Watched by Washington, Qurie and Egyptian mediators had been pushing militants to accept a full cease-fire to halt all attacks on Israelis, but Hamas -- which wanted Israel to reciprocate -- refused. The talks broke down on December 7.

"We have not given up. We will continue to work to reach a comprehensive cease-fire," an Egyptian official told Reuters.

A Palestinian source said two major-generals heading the Egyptian delegation would "convey a message from Washington" to the militants. Israeli officials made no comment.

State Department spokesman Richard Boucher said Satterfield's talks focused on checkpoints and movement for Palestinians, among other issues.

"The meeting was intended to encourage both sides to consider a set of constructive and useful steps that will help us move forward with an agenda aimed at improving Palestinian lives," Boucher said in Washington.

Separately, a senior State Department official who asked not to be identified said it was significant the Israelis were willing to sit down and hold practical talks with the Palestinians.

"That, in and of itself, doesn't create progress on some of the tough issues on the road map, particularly ending the violence, but it does help lead to the prospect of some movement," the official said.

PALESTINIAN ECONOMY CRIPPLED

U.S. and Palestinian officials said the talks with Israel on Monday, with European donor nations attending, focused on economic issues, not the peace plan. Yet Israeli officials saw implications for the flagging peace process in the new contacts. The Palestinian economy has been crippled by three years of Israeli military blockades, which Israel says are meant to stop suicide bombers but Palestinians call collective punishment.

Dov Weisglass, Sharon's chief of staff, led the Israeli team and Palestinian chief negotiator Saeb Erekat headed the Palestinian delegation, political sources said.

Underlining the difficulties of restarting peace efforts, Israeli soldiers shot and killed two Palestinians in the Gaza Strip and troops fought gun battles with militants during a raid into a refugee camp overnight.

The two were killed when troops fired on a group approaching Gaza's border fence with Israel, Israeli security sources said. They said the army was investigating whether the unarmed men were laborers trying to cross the border to get work.

The shooting occurred as soldiers backed by tanks and bulldozers demolished 10 houses in a pre-dawn raid into southern Gaza's Khan Younis refugee camp, witnesses said.

The army said soldiers destroyed several unoccupied homes used to fire mortars at the nearby Gush Katif settlement bloc.

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