Palestinian Security Affairs Minister Mohammed Dahlan and Israeli Defence Minister Shaul Mofaz ended a four-hour meeting at a hotel outside Jerusalem early on Thursday without agreement on any of the key issues.

"The two sides discussed the upcoming Israeli withdrawals from the Palestinian cities but could not reach any agreement since a large gap existed between what the Palestinians demanded and what the Israelis suggested," a spokesman for Dahlan said.

A source close to the Israeli government said Dahlan had asked Mofaz to withdraw troops from Ramallah, base of Palestinian President Yasser Arafat and one of the West Bank cities Israel reoccupied last year after a wave of suicide bombings in the Palestinian uprising for independence.

Mofaz offered instead to hand the cities of Jericho and Qalqilya over to Palestinian security as part of confidence-building measures, the source said. There was no indication why Israel preferred those cities.

They also failed to make any progress on a release of Palestinian prisoners held in Israeli jails, a gesture which the Palestinians consider vital to building trust and boosting efforts to end 34 months of violence.

The two ministers held talks after President Bush met the Israel and Palestinian prime ministers separately in Washington the past week to try to push forward the US-backed peace "road map" leading to Palestinian statehood by 2005.

Palestinian Prime Minister Mahmoud Abbas is under pressure to prove the plan's worth -- not least from militant groups from which he coaxed a three-month cease-fire on June 29.

Israel accuses the militants of exploiting the quiet under the three-month truce to regroup and has demanded a crackdown on militants by Abbas. He fears a crackdown would start civil war.

"I instructed the military to be ready for another outbreak of terror. This is inevitable and will be worse than what came before, if the terror infrastructures are not dismantled," Mofaz said in a speech in Jerusalem on Wednesday.

The Palestinians were disappointed that Bush did not publicly censure Sharon over the West Ban barrier after meeting the Israeli prime minister in Washington on Tuesday.

Secretary of State Colin Powell said however that Washington would continue to press Israel over the barrier.

"We are going to press on this issue. There are other phases of construction coming along and...this is an area that will have to be discussed as we move forward," he told Reuters.