Palestinians and Israeli hard-liners rejected statements by US President George W Bush supporting some Israeli settlements in the West Bank and ruling out the right of Palestinian refugees to return to their homes in Israel.

Israeli Prime Minister Ariel Sharon said he is ready to lift the virtual house arrest of Yasser Arafat, but military strikes against Palestinian targets will go on.

Israel is insisting that it will hold on to six West Bank towns until its demands are met, despite stiff US criticism of her widest incursion in seven years.