By ARON HELLER
The Associated Press
Tuesday, October 31, 2006; 10:53 PM

TEL AVIV, Israel -- Israel's defense minister said Tuesday that a dormant Saudi initiative for Mideast peace could be a "basis for negotiation," indicating a new possibility for talks with the Palestinians after years of stalemate.

The Saudi plan calls for a comprehensive peace between Israel and the Arab world, based on a complete Israeli withdrawal from lands it captured in the 1967 Mideast war _ the West Bank, Gaza Strip, east Jerusalem and Golan Heights.

Israeli Defense Minister Amir Peretz said he was not endorsing the plan. But he was the most senior Israeli official even to publicly consider it.

"We could see the Saudi initiative as the basis for negotiation. This does not mean that we are adopting the Saudi initiative, but it can serve as a basis," Peretz said at an academic conference at Tel Aviv University.

Fighting broke out early Wednesday in the Gaza Strip as Israeli helicopter fire killed three Palestinian militants and at least 20 people were wounded in firefights as troops moved on a northern Gaza town, Palestinian security officials said.

No Israeli casualties were reported as the troops moved into the town of Beit Hanoun, the latest phase in a 4-month-old-offensive in the area.

On Tuesday, Israeli troops shot and killed three Hamas militants during operations in Gaza.

The Saudi initiative was adopted at an Arab League summit in Beirut, Lebanon, in March 2002. For the first time, it offered Israel normal relations with the entire Arab world in exchange for a complete withdrawal from captured territory.

Israel reacted skeptically at the time, rejecting an addition by Saudi Arabia requiring Israel to recognize the demand to take back Palestinian refugees from the 1948-49 war that followed creation of the Jewish state, as well as their descendants _ an estimated 4 million people.

Israel has offered compensation instead, maintaining that demanding a "right of return" is a way of undermining the Jewish character of the state and destroying it from within.

Israel also questioned the meaning of "normal relations" and rejected a total withdrawal from all the territories.

In various unsuccessful rounds of peace talks, Israel has offered an almost complete pullout from the West Bank and Golan Heights, and last year it withdrew unilaterally from the Gaza Strip. However, it maintains that the pre-1967 cease-fire lines are not a border, and it wants to adjust the line to include main West Bank Jewish settlement blocks in Israel.

At the time, Israel asked Saudi Arabia to send an envoy to clarify the proposal, but that did not happen.

In 2003, the Saudi initiative was overtaken by the U.S.-backed "road map" peace plan, which called for establishment of a Palestinian state in a three-stage process and mentioned the Saudi initiative as part of the basis for the solution.

However, the plan was frozen from the outset when neither side implemented its initial steps. Israel failed to dismantle dozens of unauthorized West Bank settlement outposts, and the Palestinians declined to disarm violent groups.

Peace moves have been stalled since 2000, when the outbreak of Palestinian violence followed a failed summit meeting of Israeli and Palestinian leaders in the United States.

Israel's official position has been that the "road map" is the only plan on the table now, but Foreign Ministry spokesman Mark Regev indicated the Saudi plan could be the basis for talks.

"Israel has never accepted the Saudi initiative but would see positive elements in the initiative, particularly the call for reconciliation and the call for establishing normalized realizations between Israel and her Arab neighbors," Regev told The Associated Press.

Though Prime Minister Ehud Olmert's election platform this year called for a unilateral Israeli pullout from much of the West Bank, he shelved the proposal in the aftermath of the unpopular, inconclusive war with Lebanese Hezbollah guerrillas in the summer.

The addition this week of an ultra-hawkish party to shore up Olmert's governing coalition made a new peace drive unlikely.