The decision came as ministers approved a new 100-million-dollar section of the barrier, which has been sharply criticised by the United States.

Hardline ministers had been pushing for Ariel to be included within the route of the barrier.

The plan approved by a large majority of the ministers would see the settlement protected by a separate fence, however that could also later be linked with the main barrier.

Israeli soldiers captured a leader of the Islamic Jihad militant group on Wednesday in a raid at a refugee camp near the West Bank city of Jenin where he was hiding under a car, witnesses said.

The arrest of Sheikh Bassam Sa'adi quickly triggered threats of renewed violence as an Islamic Jihad leader in the Gaza Strip vowed retaliation, telling Reuters: "The enemy will pay a dear price," for his capture.

An Israeli military source confirmed Sa'adi had been held, but no immediate comment was available from the army.

The witnesses said Sa'adi, 42, was a senior leader of Islamic Jihad in the West Bank and that he had been wanted by Israel for two years. Two of his sons had recently been killed in clashes with the Israeli military, Palestinian sources said.

Soldiers backed by helicopters and tanks raided a section of the refugee camp before dawn and told residents to evacuate the area as they carried out house-to-house searches for suspected militants, the witnesses said.

They said Sa'adi was found by tracker dogs beneath a car parked outside a mosque. Three other Palestinians were also arrested in Jenin, the witnesses said. Islamic Jihad sources in Gaza said Sa'adi was beaten after he was apprehended.

Islamic Jihad has carried out dozens of attacks, including suicide bombings, that have killed hundreds of Israelis during a three-year-old Palestinian uprising for statehood.

The movement's leader in Gaza, Abdallah al-Shami, said revenge would be exacted for Sa'adi's capture. "The enemy will pay a dear price for beating Sheikh Bassam Sa'adi and for its daily crimes on our people," al-Shami said.

He said Sa'adi had eluded Israeli arrest for two years, and that his capture "will not weaken the resistance, on the contrary, it will fuel it more and more as the uprising goes into its fourth year."

In other Israeli military raids, troops seized 14 suspected militants near the West Bank cities of Nablus, Ramallah and Hebron, the army said.

Witnesses said soldiers blew up 12 homes and a tunnel used to smuggle weapons from Egypt into the Gaza Strip. Palestinian medical officials said three people were wounded in the action.