ISRAEL and the Palestinians stepped back from the brink of a new war in the Gaza Strip yesterday, sending signals to each other via Egypt that they would hold their fire unless attacked.

The tacit truce arrested an escalation to all-out fighting after five days of mounting violence, but both sides remain armed and primed for another round in the unresolved conflict that has festered since 2007.

Ismail Haniyeh, Prime Minister of Gaza's Hamas Government, praised the main armed factions in the enclave for agreeing to a truce. He said: "They showed a high sense of responsibility by saying they would respect calm should the Israeli occupation also abide by it."

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Israeli PM Benjamin Netanyahu consulted his inner circle of ministers in Jerusalem. One of them, Benny Begin, said the flare-up had subsided but the conflict was far from resolved.

Three Palestinian fighters and four civilians have been killed by Israeli fire since Saturday, and 40 wounded. Eight Israeli civilians were injured by some of the 115 rockets fired from Gaza and four soldiers were wounded by an anti-tank missile that hit their jeep and fuelled the fighting.

An official involved in the Egyptian mediation confirmed both sides were ready to stop.

But Israeli defence minister Ehud Barak said: "The matter has definitely not ended and we will decide how and when to act at the time when there will be a need."