JERUSALEM (AFP) - A Palestinian suicide bomber killed himself and an Israeli in northern Israeli today, after Palestinian leader Yasser Arafat sent his police out to crack down on Islamic militants threatening to derail a shaky truce.

As the ceasefire sank deeper into the violence that had scuttled its predecessors, Israel's dovish Foreign Minister Shimon Peres held out an olive branch, saying a Palestinian state would be created thanks to a "historic compromise."

An Israel from the Shluhot kibbutz was killed when he stopped his car to ask a Palestinian on foot what he was doing in the area near Beit Shean, in a tongue of land between the West Bank and Jordan.

At that moment the bomber detonated his device, killing both men, Israeli police said.

No group stepped forward to claim the blast, though Palestinian security officials said they suspected the radical militant group Islamic Jihad.

The attack came as Palestinian leader Yasser Arafat finally launched a crackdown on hardline Islamist groups like Jihad and Hamas which have promised to torpedo the truce he agreed to with Peres on Sept 26.

Israel has demanded the arrest of Palestinian militants as an absolute condition for going ahead with the ceasefire, and has hinted it will return to its controversial hunt-and-kill policy if Arafat does not jail the men Israel sees as the biggest threat.

Bloody campaign

The Islamic resistance movement Hamas, which has spearheaded a bloody campaign of suicide bombings in the year-long intifada, or uprising, slammed the arrest of one of its bomb-makers in the northern West Bank town of Tulkarem as a blow to "national unity."

Palestinian security officials also said that a member of Islamic Jihad had been arrested at the same time in Nablus, to the south, while two other Jihad members were detained for questioning in Jenin.

They said that Palestinian police had tried to arrest two other militants from Hamas and Islamic Jihad, but had not found the men.

Hamas' Tulkarem branch condemned the move, saying it was proof that the Palestinian Authority was accepting "Zionist orders to hurt our national unity and to hit the intifada and the resistance."

Hamas and Jihad are opposed to Israel even existing, and vowed to fight on until the Jewish state is wiped off the map.

The Israeli army's chief of staff, General Shaul Mofaz, said the arrests were "insufficent."

"The arrest are only a first step to stop the terrorism, in as much as the number of arrests is very limited," he said on Israeli army radio.

"For the moment, there is nothing to celebrate, we have to wait for the final results because in the past the Palestinian Authority has made arrests and then released the people," he said.

But Foreign Minister Peres was more upbeat in an interview published in the German weekly Bild am Sonntag today, saying: "We must arrive at a historic compromise with the Palestinians. A Palestinian state will be created".

He nonetheless issued a stern warning to Arafat to get tough with radical groups holding the peace process hostage.

"If Arafat fails to rein in the extremists then there will be more attacks, an escalation of the violence and war," he warned.

Peace impossible

However, one of Arafat's own top lieutenants, Marwan Barghuti, said in an interview to be published in Germany tomorrow that peace in the Middle East is "impossible right now."

"We have been ready to fight for 100 years," Barghuti, West Bank head of Arafat's Fatah movement, told the German quarterly Zenith , adding that if war were to erupt between the Israelis and Palestinians "it would be a real war."

"Israel has the right to live in security, but we have the same right too," he said.

And chief Palestinian negotiator Saeb Erakat blamed Israel for the sudden spike in violence despite the truce deal, saying that since Arafat and Peres met at US insistence in the Gaza Strip, 41 Palestinians had been killed and 423 injured.

He also charged that despite Israel's promises to ease restrictions in the West Bank and Gaza Strip, the army blockade had been tightened even further, making everyday travel a major burden for Palestinians.

The death toll from the year-old Palestinian uprising now stands at 866, including 667 Palestinians and 176 Israelis.