A Palestinian suicide bomber killed himself and wounded 15 people at a restaurant in northern Israel on Sunday and Israeli soldiers shot dead a Palestinian child in a firefight in the West Bank.

Israeli soldiers shot eight-year-old Sabreen Ijrewi in the head and wounded another 12 people during an exchange of fire with Palestinian gunmen in the city of Hebron, local witnesses and hospital sources said.

The Israeli army said it was checking the report and added that two Israeli border police had been wounded when the Palestinians opened fire on Israeli forces and a Jewish neighbourhood in the divided city.

The explosion in the Wall Street restaurant in the town of Kiryat Motzkin, north of the port of Haifa, followed an attack in Jerusalem on Thursday in which 15 people were killed as well as the Palestinian suicide bomber.

The blast at the Jerusalem pizzeria was the worst attack in the city since a Palestinian uprising against Israeli occupation erupted in September after peace negotiations broke down.

The militant group Islamic Jihad said in a statement sent to Reuters in Beirut that one of its members, 28-year-old Muhammad Mahmoud Nasr, had carried out Sunday's attack.

Amid diplomatic efforts to prevent the violence from escalating further, the Islamic militant group Hamas said the Palestinian Authority had arrested four of its members, one of whom Israel believes sent the Jerusalem bomber.

But Israel said the arrests did not go far enough and insisted that the Palestinians "stop terror".

Israeli Cabinet Minister Danny Naveh put the responsibility for Sunday's attack on Palestinian President Yasser Arafat.

"The responsibility for this terrible bloodshed, attack in Israel today lies solely on the shoulders of Mr Arafat," he told Reuters. "He has given the green light to Islamic Jihad and Hamas to commit suicide bombings in Israel."

U.S. envoy David Satterfield was due to hold talks with Israeli and Palestinian leaders, and European Union envoy Miguel Moratinos was due to arrive in the region on Monday.

Before the bombing, Israeli Prime Minister Ariel Sharon gave Foreign Minister Shimon Peres the go-ahead to hold talks with the Palestinians on implementing a U.S.-brokered ceasefire between the sides that never took hold.

"Sharon allowed Peres to undertake a dialogue with the Palestinians only regarding the ceasefire... and they agreed there would be no negotiations about political solutions as long as the violence continues," an Israeli political source said.

Sharon has refused to hold political talks with the Palestinians until all forms of violence end.

But Palestinian officials said the decision would be meaningless unless Israel vacated nine Palestinian offices it took over in and around Arab East Jerusalem following the bombing in Jerusalem on Thursday.

"There's nothing new in Peres having talks with us. Peres met senior Palestinian officials including President (Yasser) Arafat many times. What we want is for Sharon to revoke his latest orders," Palestinian minister Saeb Erekat told Reuters.

The bombing had apparently not affected Sharon's decision, the Israeli source said.At least 516 Palestinians, 147 Israelis and 14 Israeli Arabs have been killed in the fighting.