GENEVA -- Three of every four Palestinians live in poverty and their economy still depends on donors, despite 4.5 percent economic growth last year, the United Nations said on Wednesday.

The rise was fueled largely by agriculture and small businesses, which engage in ``forced import substitution'' because so few goods can get past Israel's tough blockade, said Raja Khalidi, a senior official at the U.N. Conference on Trade and Development.

But the increase in Gross Domestic Product follows two years of ``freefall'' since the outbreak of Israeli-Palestinian fighting in late 2000 and is unlikely to be sustained, Khalidi said.

``The fact that there was growth in 2003 is really a matter of bottoming out, not a rebound,'' he said, as he launched UNCTAD's annual report on the economic consequences of the conflict. ``Treading water is perhaps an apt metaphor,'' Khalidi later told the AP.

The Palestinian economy has been hit by Israeli roadblocks and closures, which have hampered commerce in the West Bank and Gaza Strip.

Israel says the restrictions are needed to stop Palestinian suicide bombers and gunmen who have killed around a thousand Israelis. Around 3,000 Palestinians have died.

The World Bank has cited a 40 percent fall in Palestinian per capita GDP since the outbreak of violence, saying it far exceeds the impact of the Great Depression in the United States.

``The Palestinian economy is being transformed into one of subsistence,'' said Khalidi.

Average income among the 3.5 million Palestinians fell from $1,750 a year in 1999 to $1,040 last year. Overall, 72 percent of Palestinians live below a poverty line of $3.60 a day.

Some 127,000 Palestinians used to work in Israel, providing vital income for many families. But under security restrictions the number has slumped to 53,000.

Around 277,000 Palestinians are unemployed, from a 792,000-strong work force, according to U.N. figures. The figure would be worse but for the Palestinian economy's ability to absorb many workers who used to have jobs in Israel, albeit at far lower wages, the report said.

Palestinian areas also rely on international aid to keep the economy afloat, Khalidi said. ``It's a crutch, and without that crutch (growth) is not sustainable,'' he said.

DUBAI (Reuters) - Secretary of State Colin Powell said on Wednesday that Palestinians should end a four-year-old revolt because it was spreading terrorism and hindering the creation of an independent Palestinian state. "It is time to end the uprising. We want a Palestinian state. The (U.S.) president wants the establishment of a Palestinian state for the Palestinian people which exists side by side with Israel," Powell told Arab satellite television Al Jazeera. His comments were translated into Arabic.

"This will only happen when terrorism ends. But the uprising has helped spread terrorism and has not accomplished anything during these years except adding to the deterioration of the Palestinian economic situation and the deterioration of living standards in general among Palestinians," he said.

Violence has spiralled on the heels of the fourth anniversary of the Palestinian revolt, which broke out following the visit of then Israeli opposition leader, now Prime Minister Ariel Sharon, to a sensitive Jerusalem holy site on Sept. 28, 2000.

"The uprising has prevented us from achieving progress in several peace plans," Powell said.

Last year, the Quartet of Middle East peace mediators -- the United States, Russia, the European Union and the United Nations -- adopted the so-called "road map" peace plan calling for mutual steps toward an interim Palestinian state in 2005.

Ministers of the group said after a meeting last Wednesday that no significant progress has been made in implementing it.

With new upscale restaurants, bars, and theater, the West Bank city is undergoing a cultural revival.

Just a few minutes drive from Yasser Arafat's half-destroyed headquarters, Usama Khalaf's version of upscale Ramallah dining is taking off.

His restaurant called Darna occupies a grand renovated stone villa with high-ceilinged archways and a second-floor patio that draws scores of young Palestinians. It serves large dishes of innovative Middle Eastern fare, but, more importantly, offers fragments of normalcy, which has become so elusive during the past four years.

The $800,000 spent by the restaurateur to open Darna - where waiters sport snappy bow ties and tuxedo vests - represents more than a shrewd bid to attract the city's bourgeois; it signals a revival of the cultural scene that made Ramallah a cosmopolitan capital for Palestinians.

In recent months new eateries have opened and the city's offerings have expanded despite Israel checkpoints and military raids. For Khalaf, opening Darna was simultaneously the fulfillment of a life's dream and an act of political defiance.

"I had an obligation to my hometown," Khalaf says. "When they saw someone investing despite the closures and incursions, it gave people the willingness to stay."

In the 1950s under Jordanian rule, Arab vacationers would arrive in Ramallah from the Persian Gulf in the summer to savor the cool mountain breeze during the evening. Pleasant weather and pastoral surroundings earned the tiny city the nickname "the Bride of Palestine." When the West Bank came under Israeli control, the Arab citizens of Israel would overrun the city's hotels on the weekends. It boasted a thriving nightlife, which included the only jazz club in the West Bank.

Danny Jafar, the grandson of a Ramallah hotelier, opened the Sangrias restaurant during the first year of the fighting with just five tables and a menu featuring nachos and burritos.

During the four months of daily military curfews in the summer of 2002, word of mouth spread that Sangrias had remained open for journalists. Patrons desperate to break the monotony of the citywide lockdown surreptitiously found their way to the bar. "I used to open up when people would go home and the tanks would come out," Jafar says. "Lights would be off and curtains would be drawn, but there were people inside. It was a hangout."

Last month, Jafar opened a new lounge area out back and expanded Sangrias' capacity to 45 tables. On a recent Saturday night, recordings by American rapper 50 Cent played from a stereo in the courtyard and smoke from nargilla water pipes floated among diners under illuminated walnut trees.

"I could be at a funeral procession in the morning and I could be at a bar at night," said Sameh Katkhuda, an information technology consultant. "This isn't Ramallah. It's San Francisco."

Unlike other cities in the West Bank, Ramallah is a base for the Palestinian government, nonprofit organizations, and foreign diplomats, providing for a steady flow of disposable income. The international presence in the city of 21,000 (the population goes up to 250,000 if you count surrounding villages) has helped turn it into hub for cultural institutions. The Ramallah Cultural Palace, a state-of-the art auditorium that opened in July, has already hosted a film festival and a production of "Al-Fawanees," the first Palestinian musical.

"As an outsider, you would think that there's no place for cultural activities or a cultural life," says Rita Janssen, a UN official who is the director of the cultural palace. "But it seems to be more important to them than when you're living in peace and quiet."

Hours after a performance of "Al-Fawanees," both Ms. Janssen and casts members were dining at Darna, where 20-somethings wearing American athletic jerseys had gathered to lounge in the patio.

When the restaurant was featured on Israeli television news magazine, Ariel Sharon is said to have been "amazed" at the site of such an establishment, owner Khalaf recalled with satisfaction.

"We're not just suicide bombers. We don't love just blood," Khalaf said. "We have another face. Ultimately, we have a desire to live."

Israel's deputy defense minister threatened Tuesday to target Hamas political leaders, calling them "terrorists in suits" after a rocket attack by the Islamic militant group killed an Israeli woman.

The harsh words were backed up by action. Israel airstrikes targeted two suspected arms caches and two Hamas bases. Later, an Israeli helicopter strafed a rocket launch site with machine-gun fire near the northern Gaza town of Beit Hanoun. Palestinian officials said a total of 10 people were wounded.

The 31-year-old woman who died Monday night was the first Israeli killed by a Palestinian rocket since November, inviting a harsh response. Militants fired nine more rockets at Israel on Tuesday, slightly wounding two people, the army said.

Israeli leaders suggested that even Palestinian Prime Minister Ismail Haniyeh of Hamas could be targeted in reprisals, with Deputy Defense Minister Ephraim Sneh calling Hamas' leaders "terrorists in suits" in a radio interview.

"We don't care if he's a ringleader, a perpetrator of rocket launching or if he is one of the political leaders," Sneh later told The Associated Press. "No one has immunity."

Wary of Israeli strikes, leaders of Hamas and other Palestinian militant groups in Gaza have lowered their profiles, turning off cell phones and staying off the streets.

In Gaza, Hamas spokesman Sami Abu Zuhri threatened harsh retaliation if the group's leaders were attacked.

"Harming ... any of Hamas' leadership will cost the occupation dearly," he said. "This will mean responses." He did not elaborate.

Palestinian President Mahmoud Abbas, of the moderate Fatah, traveled from his West Bank headquarters to Gaza for talks with Hamas leadership in a last-ditch attempt to salvage a truce with Israel and rein in factional bloodletting between the two factions.

Abbas himself is seen as a potential target of Hamas. Witnesses said he entered the strip Tuesday evening in a motorcade of dozens of vehicles bristling with armed guards, while presidential security forces locked down central Gaza thoroughfares and marksmen staked out rooftop vantage points along the route to his seafront official residence.

Fatah officials said Abbas would meet Haniyeh but would not divulge the timing or location, citing security concerns.

After a six-month lull, Israel resumed airstrikes on militant targets in Gaza last Wednesday in response to heavy rocket fire. More than 40 Palestinians, most of them militants, have been killed.

Despite Israeli vows of harsh retaliation in response to Monday night's Sderot attack, Prime Minister Ehud Olmert acknowledged there is no quick solution for the rocket barrages.

Israel's high-tech military has not been able to find a solution for countering the crude homemade rockets. In the past week, more than 150 rockets have landed in and around Sderot, a town of 24,000 people about a mile from the Gaza border.

Defense Minister Amir Peretz told visiting European Union foreign policy chief Javier Solana that Israel was holding off on launching a major ground offensive into Gaza in order to give diplomacy a chance to defuse the crisis, Peretz's office said.

The government evacuated hundreds of Sderot residents to hotels in other parts of the country for the Shavuot Jewish holiday, which began at sundown. The evacuation was orderly, and Israeli soldiers helped people board the buses.

Mechi Friederwitzer-Fendell, who immigrated to Israel from New York city in 2000 and has raised seven children in Sderot, said she is staying put. But she urged the government to get tougher still with the Palestinians.

"Maybe we should knock down some houses," she said. "They fire a missile and we destroy a few houses, let them realize that we can't stand for this."

Hamas' rocket attacks apparently have been aimed at triggering an Israel response that could unite Palestinians and end the infighting. Some 50 people were killed in the factional violence last week.

Ahmed Youssef, a senior Hamas official, said the group would consider talks on a cease-fire, if Israel first stopped its "mad attacks."

"The aggression must stop so we can talk about a comprehensive cease-fire," said Youssef, a top aide to Haniyeh. "The government is working on expanding the truce. This is a national interest."

Israel dismissed talk of a new cease-fire, saying Hamas never sticks to truces.

"Hamas ... is leading the violence," Peretz said. "We don't intend on stopping. We will stop at the point that the rockets stop."

Jerusalem -- Israel's defense minister expressed growing frustration with Palestinian leader Mahmoud Abbas in an interview published Friday, saying he sees little chance of a peace deal in this generation.

Defense Minister Shaul Mofaz dismissed Abbas as "a one-man show" bereft of support from his own people. Prime Minister Ariel Sharon declared Thursday he would not meet Abbas until he cracks down on militants, and shortly afterward, an Israeli missile strike against Islamic Jihad gunmen in Gaza killed seven Palestinians.

The latest round of fighting and Israel's unprecedented criticism of Abbas pushed the prospect of peace talks _ promising after Israel's Gaza pullout last month _ further off the table.

The week began with Israeli troops killing the top Islamic Jihad gunman in the West Bank, followed by an Islamic Jihad revenge bombing that killed five Israelis in an open-air market in the central Israeli town of Hadera.

In response, Sharon threatened a "broad and relentless" offensive against militants, including mass arrests and airstrikes. But security officials said Israel would stop short of carrying out a large-scale military operation.

On Thursday evening, in Gaza's Jebaliya refugee camp, Israeli aircraft fired missiles at a car carrying four Islamic Jihad members, killing them and three bystanders. Hospital officials said 15 people were wounded.

Among those killed was Shadi Mohanna, Islamic Jihad's field commander for northern Gaza. Israel said Mohanna was responsible for rocket barrages on Israeli towns and for recruiting attackers.

About 20,000 mourners, among them hundreds of masked gunmen, turned out for the victims' funeral Friday, parading the bodies on stretchers from a mosque near Jebaliya. The gunmen, from both Islamic Jihad and Hamas, fired volleys in the air while women and children, some weeping, watched from balconies.

Late Thursday and early Friday, Israeli helicopters repeatedly fired missiles at northern Gaza, targeting militant rocket launch sites. In the West Bank, Israeli troops rounded up 12 Islamic Jihad activists.

Islamic Jihad threatened revenge.

"There will be a painful, immediate response" to the missile strike, said Khader Habib, a spokesman for the group. Late Thursday, Islamic Jihad said it fired rockets at Israel. However, witnesses said they landed inside Gaza and there were no reports of casualties.

On Friday morning, the Israeli army said a single rocket fired from Gaza fell on empty ground in southern Israel, causing no damage.

Israeli aircraft responded with missile attacks on three empty spots in northern Gaza previously used as rocket launch sites, the military said. Palestinian witnesses said nobody was hurt.

Abbas, widely known as Abu Mazen, has condemned the latest suicide bombing, but Israel said he must do much more. Sharon said Thursday he would not meet with Abbas unless he takes "serious and tangible action" against militants.

In his interview with the Yediot Ahronot daily, Mofaz launched a scathing attack on Abbas, saying he had become so ineffective and isolated from his people that he is not a partner for negotiating a peace deal with Israel.

"Abu Mazen is a one-man show," Mofaz was quoted as saying. "Behind him, there is nothing, only emptiness. Governmental vacuum. In fact, there is no one to talk to. Abu Mazen and his colleagues in the Palestinian leadership ... have not done a thing so far. The Palestinian Authority is not an address for us."

Mofaz said the best that could be expected was another round of interim agreements between Israel and the Palestinians.

"I'm not at all sure that we can ever reach a peace agreement with the present Palestinian leadership," Mofaz told the paper. "We shall have to wait for the next generation."

While Israeli leaders have largely avoided personal criticism of Abbas, Mofaz's comments are in line with Sharon's preference for a long-term interim deal that would allow Israel to avoid dealing with explosive issues, such as the fate of Jerusalem and Jewish settlements in the West Bank.

Palestinian negotiator Saeb Erekat said Israel does have a partner for peace talks in the Palestinians. But he added Mofaz's statements showed Israeli contempt for Palestinian institutions, bred by years of occupation.

"I don't think Israel's problem is with this generation or that generation of Palestinians or this person or that person. Israel's problem is with the whole Palestinian people," he said.

Israel expects Mahmoud Abbas to win Sunday's Palestinian presidential election and is ready to open talks with him, offering to free Palestinian prisoners if Abbas cracks down on Palestinian rocket attacks, senior Israeli officials said.

Opinion polls showed Abbas with more than double the support of his nearest rival, democracy activist Mustafa Barghouti, but he was struggling to win a clear mandate to push forward with his agenda of resuming peace talks with Israel and reforming the corruption-riddled Palestinian Authority.

The Israeli officials, speaking on condition of anonymity, said the first meeting should take place shortly after the election.

To facilitate the elections, Israel also began slowly easing travel restrictions in the West Bank and Gaza Strip on Saturday, though problems remained and new checkpoints sprouted in some areas, international election observers said.

Despite the difficulties, Palestinian election officials said ballot boxes were distributed to more than 1,000 polling stations throughout the West Bank and Gaza for Sunday's vote to replace Yasser Arafat, who died in November, as Palestinian Authority president.

The Israeli officials stopped short of stipulating a total halt to the Palestinian bombardment of mortar shells and locally made Qassam rockets. Instead they spoke of "100 percent effort."

"The test for (Abbas) will be first and foremost to wage war against the firing of Qassams. He will be asked to take very specific steps, which are within his ability to implement," a senior official said. "That will be at the core of the first conversation we shall have when (the sides) meet."

The officials said the Israeli side would propose to Abbas that his security forces close Palestinian metal workshops and explosives labs producing the projectiles. Israeli intelligence would identify the targets for the Palestinian forces, they added.

Palestinian militants in the Gaza Strip have in recent months increased mortar and rocket attacks on Israeli targets to make it appear that Israel's planned withdrawal from the area this summer is a retreat. Israel has in turn launched military operations in Gaza to try to thwart the attacks.

The Israelis did not give any details of the planned prisoner release. Israel holds some 7,000 Palestinians in jails and military prisons.

Ensuring their release has been a constant Abbas demand, both in his election campaign and during a four-month stint as Palestinian prime minister in 2003.

Israel freed 159 prisoners last month as a gesture to the new Palestinian leadership and as part of a swap with Egypt for an Israeli jailed by a Cairo court as a spy. But the Palestinians complained that most of the prisoners were near the ends of their terms anyway and demand a far broader release.

Israel refuses to release Palestinians it says carried out attacks on Israelis, while the Palestinians want all inmates freed.

Separately, Palestinian officials said the vote would be the first in a series of elections for new officials, and on Saturday caretaker Palestinian Authority President Rauhi Fattouh set July 17 as the date of long-delayed legislative elections. That vote had been expected to be held in May, but Fattouh said he changed the date so it would not interfere with school exams. The last legislative elections were held in 1996.

Election observers that toured the region Saturday said freedom of movement had improved at many major roadblocks, but there were some new checkpoints in the northern West Bank that made passage through that area difficult, despite the Israeli promises to ease restrictions and stay out of Palestinian population centers.

"We're finding today a very inconsistent story," said Les Campbell, spokesman for the team of observers from the National Democratic Institute, an American organization. "We're going to try and make some constructive suggestions (to Israel) and hope that things will be better tomorrow."

At a checkpoint in Gaza, hundreds of cars were waiting early Saturday, though traffic later eased. Palestinians reported that a 60-year-old taxi passenger was killed by army fire at the barrier. The army said soldiers fired at a gunman approaching on foot.

Palestinian Cabinet minister Saeb Erekat said the situation had not improved.

"I urge the Israeli government to honor its commitment to lift the siege and restrictions. This is really threatening to undermine free and fair elections," he said.

Israeli officials said the military had only promised to ease, not lift, restrictions, and security remained the top priority, especially in light of Friday's attack outside the West Bank city of Nablus that killed one Israeli soldier and wounded three others.

Israel warned Palestinian leaders it would reconsider easing restrictions if militants exploited the situation.

Israel delivered the message through international observers headed by former President Carter and former French Prime Minister Michel Rocard, according to Campbell. Carter, who was part of the NDI delegation, met Abbas and later visited Arafat's grave in the West Bank city of Ramallah.

Foreign policy chiefs from around the globe have been lining up to visit Israeli and Palestinian officials, proclaiming a new era of opportunity has arrived.

Diplomats caution that a resumption of Israeli-Palestinian peace talks will take time. But they are eagerly looking forward to next month's Palestinian presidential elections as an important test and are offering cash and other assistance to make sure the vote goes smoothly.

"I think the present situation with the coming election is a great opportunity ... to move toward a resumption of the peace talks, which will lead to two states living peacefully side by side," German Foreign Minister Joschka Fischer said during a stop in Israel last week.

Fischer was the latest in a series of high-profile visitors since Arafat's Nov. 11 death. First was European Union foreign policy chief Javier Solana, who attended Arafat's funeral in the West Bank town of Ramallah before huddling with Palestinian officials.

He was followed by Secretary of State Colin Powell and foreign ministers from Russia, Britain, Egypt, Spain and Germany. British Prime Minister Tony Blair is expected shortly before Christmas.

Israel, meanwhile, has agreed to attend a Mideast conference in London early next year, backing off its earlier reluctance to participate, a senior official said Thursday.

The official, speaking on condition of anonymity, said Prime Minister Ariel Sharon has sent a letter to Blair agreeing to attend the conference, tentatively scheduled for February.

In the past, Israel has been cool to participating in international Mideast conferences, fearing outside intervention in its conflict with the Palestinians.

Palestinian officials have welcomed talk of a Mideast conference, hoping to use the event as a springboard for restarting peace negotiations.

But the Israeli official said the meeting should focus on reforming the Palestinian Authority and reviving the Palestinian economy.

"There is definitely an understanding between the prime minister and Blair's office on the focus of the conference," the official said.

Earlier Thursday, Dov Weisglass, a top aide to Sharon, expressed high hopes for the London conference, calling it "maybe the most significant development in the near future."

The diplomacy - and sense of optimism - is a dramatic contrast to the atmosphere when Arafat was alive.

Israel and the United States described Arafat as an obstacle to peace, accusing him of backing militant attacks against Israel. U.S. officials did not call on him, and Israel made it clear that foreign officials who visited the Palestinian leader would not be welcome in Israeli government offices.

U.S. Embassy spokesman Paul Patin said Powell's visit and the White House's stated intention to make the Israel-Palestinian conflict a top priority were a recognition of a changed political landscape. "We didn't only say that Arafat was an obstacle, he was an obstacle," said Patin.

European diplomats acknowledge that officials couldn't - or wouldn't - visit while Arafat was alive.

"The disappearance of President Arafat gives an opportunity for a new dynamic," Spanish Foreign Minister Miguel Moratinos said earlier this month.

Egypt, which recalled its ambassador from Israel shortly after the September 2000 outbreak of the Palestinian uprising, has also become more upbeat.

After years of disparaging Sharon, Egyptian President Hosni Mubarak recently praised the Israeli leader as the region's best chance for peace. In a dramatic goodwill gesture, Egypt last week released an accused Israeli spy, and speculation is high that the Egyptian ambassador to Israel will soon return.

Egypt also has played an important role in promoting Sharon's plan to withdraw from the Gaza Strip next year, offering to help ensure security after the pullout.

For now, however, the world's attention is focused on the Jan. 9 Palestinian presidential vote. Both Israel and the international community have given tacit support to interim Palestinian leader Mahmoud Abbas.

Israel has pledged to pull troops out of Palestinian population centers for 72 hours during the vote, while the international community has offered millions of dollars in aid and international observers.

Announcing $3.5 million in election assistance, U.S. Mideast envoy William Burns spoke of the bloodshed and loss of hope in recent years.

"Palestinians deserve credit for their careful management of a difficult leadership transition, and their commitment to the electoral process. Israel has been commendably clear in its commitment to facilitate elections," Burns told a gathering of Mideast donors in Oslo, Norway.

The U.S. election aid was in addition to $20 million in direct assistance to the cash-strapped Palestinian Authority.

The European Union has allocated about $18.6 million for preparing the Palestinian elections, while Japan has committed $1.1 million and will send electoral observers.

Diplomats say the ultimate goal is to resume talks on the "road map," an internationally backed peace plan that seeks to create an independent Palestinian state alongside Israel next year. They also warn that the road forward has potential hazards.

They say Israel must keep its pledge to allow free movement of candidates and voters around the Palestinian territories, and the U.S. administration must live up to its public commitment to take a more hands-on approach than it did in President Bush's first term.

Palestinian officials said they were concerned about recent comments by Bush, who described Palestinian democracy as "the heart of the matter." They said Bush is ignoring the Palestinians' first priority: ending Israeli occupation.

"I don't think that democracy can exist under occupation," said Palestinian Cabinet minister Saeb Erekat.