Military jeeps and armoured personnel carriers streamed out of Bethlehem in the final hours before the handover, expected to be in effect by late afternoon. Under the deal, Palestinian police will curb militants and prevent attacks on Israelis.

Earlier AFP from Jerusalem reported that the US-backed road map for West Asia peace received a further boost on Wednesday as Israeli forces was preparing to withdraw from the southern West Bank town of Bethlehem and its environs as a test case for the rest of the West Bank.

Palestinian Prime Minister Mahmud Abbas had earlier said that he believed the Israeli army would withdraw within six weeks from all positions occupied in the West Bank.

The Bethlehem move follows a flurry of activity as both sides attempt to move along the international road map for peace, which envisages a completely independent Palestinian state living in peace alongside Israel by 2005.

Five Palestinian factions have agreed to a freeze on anti-Israeli attacks, Jewish forces have withdrawn from areas in the northern Gaza Strip and handed over of control of Gaza's main highway to the Palestinians for the first time since the beginning of the Palestinian uprising.

Abbas and Israeli Prime Minister Ariel Sharon held talks here Tuesday, which both sides hailed as positive.

The two leaders gave a public display of smiling goodwill, as they attempted to push the peace plan further along following a partial Israeli withdrawal from the Gaza Strip and the decision by five Palestinian armed groups to honour a truce deal.

Sharon and Abbas agreed to form joint committees on crucial issues in order to bring about a halt to 33 months of fighting and revive the peace process, the Palestinians said.

"What was encouraging about this meeting was that it enabled outstanding issues to be discussed in a constructive manner and without sliding into useless controversy," Sharon's spokesman Raanan Gissin told AFP after the meeting.

Sharon admitted that "painful compromises must be made to achieve peace," but he insisted that Israel would not make "any compromise with terrorism".

Calm prevailed across most of the Palestinian territories Tuesday, punctuated only by a shooting incident near the northern West Bank city of Tulkarem that left an armed Palestinian dead.

Israeli military sources said the man approached an army roadblock and opened fire with a pistol. Soldiers fired back and killed him.

Meanwhile Palestinian leader Yasser Arafat said Palestinian security forces had arrested the gunman responsible for the killing of a Bulgarian construction worker on Monday.

Radkov Krastio was shot while driving a truck near Jenin in an attack claimed by the Al-Aqsa Martrys' Brigades, an armed offshoot of Arafat's Fatah (news - web sites) group which later the same day agreed to sign up to the truce.

In a move that angered Muslims, Israel police said visits by Israelis and foreign tourists to Jerusalem's Al-Aqsa mosque compound, a site holy to both Jews and Muslims, would continue.

The visits recently resumed for the first time since the intifada broke out nearly three years ago.