The worst violence in more than three years erupted in the West Bank and Gaza yesterday with rioting in which Israeli soldiers and Palestinian police fought a running gun battle.

Israel's Channel One news,quoting Palestinian officials, said seven Palestinian policemen died; other reports said two. Some 300 people were injured, a dozen by bullets, reinforcing allegations that Israeli soldiers used live ammunition in place of rubber-coated metal bullets. Witnesses said five policemen and five journalists were among the injured.

For four hours youths fought troops in Palestinian-controlled Bethlehem. Masked youngsters danced and cheered on rooftops, bombarding troops with masonry and metal poles.

It was the most serious unrest since Ehud Barak became prime minister last year and came despite his decision to convene the cabinet yesterday morning to ask approval for a land transfer to the Palestinians, which placed his coalition under renewed threat of collapse. The cabinet agreed to transfer Abu Dis village, on the edge of Jerusalem, and where Yasser Arafat has erected a parliament building, to full Palestinian self-rule, with two other Arab villages.

It incensed the right-wing and prompted the National Religious Party, which has five Knesset seats, to quit the government, accusing Mr Barak of dividing Jerusalem. But the transfer was approved by the Knesset last night, when Mr Barak narrowly won a vote of confidence.Earlier, he said the transfer of Abu Dis, a mile from the Dome of the Rock in Jerusalem's Old City, would avoid the "stalemate and deterioration" of the peace talks. He also said it would help strengthen Israel's claim to retain sovereignty over the city itself.

But this appeared to do nothing to mollify the Palestinian public, who have demanded the right to create their capital in Arab east Jerusalem - captured by the Israelis in 1967 and later annexed - and not in a village outside the city boundaries. Certainly Mr Barak's move did nothing to impress the thousands of young Arabs who took their frustration and despair out on to the streets.

The unrest came on the 52nd anniversary of the inauguration of the state of Israel, a day the Palestinians mourn as the Nakba, or catastrophe. The protests were also part ofdemonstrations over Israel's refusal to release 1,650 jailed Palestinians.

But there were convincing Israeli claims that the demonstrations were encouraged by Mr Arafat's Palestinian Authority, perhaps as an attempt to remind Mr Barak of the nightmare of the intifada uprising in the hope that this will encourage him to make more concessions.

If so, matters got badly out of hand. It was the worst violence on the West Bank since September 1996, when 80 Palestinians and Israelis died in three days of unrest sparked by an Israeli decision to open a tunnel near a Muslim shrine in Jerusalem's Old City.

Although the peace negotiations have continued to stumble painfully along despite such crises, yesterday's events are only likely to do more damage.

They were further complicated by the resignation of the chief Palestinian negotiator, Yasser Abed Rabbo. He left yesterday, accusing Israel of trying to divide his camp, after discovering that a secret, separate channel of talks had been opened in Stockholm.

The worst unrest was in Ramallah, on the West Bank, where Israeli soldiers and Palestinian snipers exchanged fire for two hours. A Palestinian journalist, Maher Abu Khater, was severely wounded by a shot to the neck.

In Gaza a pall of smoke and tear-gas hung over the landscape as hundreds of demonstrators set fire to tyres and stoned troops.

The Palestinian-Israeli peace track has hit bad patches before. As darkness fell, Mr Barak and Mr Arafat agreed to a "ceasefire" and the violence began to die down. But yesterday was among the roughest patches yet.