Deputy Defence Minister Zeev Boim's comments, which came a day after Israel said it had thwarted a suicide bomb attack on a school, were the clearest statement yet that Israel would respond favorably to a ceasefire offer.

Negotiations between various Palestinian factions in Cairo were being mediated by Egypt and were aimed at achieving some sort of truce in exchange for a halt by Israel of targeted killings of militant leaders and raids on Palestinian population centers.

"If the Palestinians agree to a ceasefire in Cairo, it's certainly not out of the question that Israel will agree to restrain its military activity," Boim told Israel Radio.

In other developments, Israel's Housing Ministry said it had authorised new housing construction in the West Bank settlement of Ariel. Palestinians condemned the announcement and said it endangered the chances of success in Cairo.

Israel announced the arrests of the alleged suicide bombers late Wednesday, hours after declaring a terror alert in parts of northern Israel.

The restrictions were lifted after Israeli troops raided a mosque in the West Bank village of Bardala, arresting two men, said Tadji Sawafta, a local official.

Israeli media reported that one was wearing an explosives belt of the type used in suicide bombing attacks.

Bardala is on the line between Israel and the West Bank, nine miles south of the Israeli town of Beit Shean.

Dore Gold, an adviser to Israeli Prime Minister Ariel Sharon, said the attackers planned to carry out a suicide bombing in a school in the Israeli town of Yokneam.

He said it "demonstrates the necessity of Israel's ongoing security measures including the completion of its security fence," a barrier Israel is building that has drawn criticism because its route cuts deep into the West Bank to encircle Israeli settlements.

The army also announced Thursday that it had confiscated an envelope full of explosives in a mail truck in the Gaza Strip bound for Israel. No further details were released.

Meanwhile, an advertisement published in an Israeli newspaper invited contractors to bid for the construction of 13 homes in Ariel, the second-largest West Bank settlement, near the Palestinian city of Nablus.

Palestinian peace negotiator Saeb Erekat said the expansion of Ariel threatened the Cairo ceasefire efforts, which were beginning Thursday.

"We're about to engage in a serious Palestinian-Palestinian dialogue," Erekat said.

"I want to call upon the Israeli government to stop thinking unilateral, and to refrain from more settlements, walls and incursions, and to think bilateral," he added.

Palestinian Prime Minister Ahmed Qureia hopes to present the truce offer to Israel and resume stalled talks on the US-backed "road map" peace plan.