THE Israeli government yesterday granted "national priority status" to Jewish settlements in the occupied territories - a move designed to encourage significant population growth in the settlements, and one greeted by Palestinian officials as another crippling blow to peace hopes.
Under pressure from settler leaders to approve what they termed "an appropriate Zionist response" to Wednesday's killing by Palestinian militants in the West Bank of an Israeli settler and her son, Mr Netanyahu rejected some ministers' calls for a new settlement to be built in the memory of the two victims.
After initially favouring the idea, he also ultimately came down against a proposal for a new 1,000-home neighbourhood at Beit El, the settlement near Ramallah where the bereaved family lives.
But the decision to grant priority status to all settlements may well ultimately prove far more significant.
The 25 per cent income tax relief, investment incentives and other financial benefits of the priority status are likely to draw a wave of Israelis to join the 150,000 who already live in the settlements - and thus to further complicate efforts to reach agreement with the Palestinians on the final status of the West Bank.
When he came to power in 1992, the late Labour prime minister, Yitzhak Rabin, rescinded the priority status settlements had enjoyed under previous Likud government - putting the brakes on Jewish population growth in the West Bank and signalling to the Palestinians a genuine readiness for compromise that, in turn, sparked the Israel-PLO peace accords of 1993.
Mr Netanyahu's decision to restore the incentive programme marks another stage in the deterioration of Israeli-Palestinian relations - from the tentative partnership of the Rabin era, back to the familiar adversarial basis.
The chief Palestinian peace negotiator, Mr Saeb Arekat, said yesterday the Israeli government appears to be "kissing goodbye" to the peace process.
Mr Netanyahu's spokesman insisted the prime minister remained committed to the peace process, but was demanding proof of Mr Arafat's commitment - in the form of the capture and extradition of the gunmen who carried out Wednesday's killings.
Israeli-Palestinian co-operation in the wake of the attack has been exemplary, both sides agree, but Israel argues that Mr Arafat should be doing more to prevent such incidents taking place in the first place - by cracking down on militant opposition groups.
David Horovitz is managing editor of the Jerusalem Report
. Katyusha rockets hit the western Galilee region of northern Israel last night, the Israeli army and security sources said. Hizbollah denied it had launched any rockets. Officials of three radical Palestinian guerrilla factions in Lebanon also said they had not carried out any rocket attacks on northern Israel.