JERUSALEM (AP) Foreign Minister Shimon Peres is preparing a peace initiative that reportedly calls for Israel to dismantle its settlements in Gaza, a move opposed by Prime Minister Ariel Sharon, his partner in Israel"s brittle government.

The independent plan could cause a rift within a government increasingly divided over Israel"s two-week incursions into Palestinian-controlled towns in the West Bank. Peres acknowledged yesterday he was preparing a plan but refused to elaborate on its details.

Peres told reporters he would likely meet with Palestinian leader Yasser Arafat over the weekend at an economic conference in Spain, the first high-level contact since the incursions were launched. But he stressed the two wouldn"t negotiate.

"Negotiations should be prepared very carefully, otherwise it will create a disappointment instead of a hope," he said.

Arafat, who was in Rome yesterday, called for negotiations with Israel.

"I call on Sharon to go back to the negotiating table," he said by phone during an Italian TV show. "Let"s go back to implementing the accords, let"s go back to saving the peace process with no conditions, no military pressures."

Peres repeated that Israel had no intention of remaining in four West Bank towns occupied after Palestinian militants gunned down an ultranationalist Cabinet minister on Oct. 17, saying Israel would retreat when security was guaranteed.

Israeli and Palestinian security officials, however, failed Monday to set a new timetable for the pullout from the areas Israel holds in Tulkarem, Qalqilya, Ramallah and Jenin, with Israel demanding the Palestinians arrest more militants before it withdraws.

Under strong international pressure, Israel left Bethlehem and Beit Jalla late Sunday.

Palestinian security officials said they had arrested two members of the militant group Islamic Jihad on Monday, something Peres said he welcomed if true.

In Gaza, Palestinians fired several mortar rounds into a Jewish settlement early yesterday, and Israeli troops briefly entered Palestinian-controlled territory in search of the source of fire.

Israel has killed 38 Palestinians, including civilians, in the incursions, which began after the assassination of Israeli Tourism Minister Rehavam Zeevi. The radical Popular Front for the Liberation of Palestine claimed the killing as revenge for its own leader"s Aug. 27 killing by Israel.

The United States strongly opposed the incursions, concerned they could endanger moderate Arab support for the operation in Afghanistan. On Wednesday, State Department spokesman Richard Boucher renewed the demand that Israel withdraw its forces from all Palestinian-held areas on the West Bank.

Members of Peres" moderate Labor Party are also increasingly unhappy over the occupations, Israel"s widest military operation in 13 months of fighting that have killed 730 people on the Palestinian side and 191 on the Israeli side.

Many party members are demanding Labor bolt Sharon"s coalition. Although Sharon theoretically could still muster a majority, he would be at the mercy of hard-line parties demanding much harsher action to quell the Palestinian uprising.

According to the Israeli newspaper Maariv, under Peres" proposal, Israel would completely pull out of all of the Gaza Strip two-thirds of which is a Palestinian autonomy zone and dismantle the settlements there where some 7,000 Israelis live amid more than a million Palestinians.

The newspaper said the plan included creating a Palestinian state, but did not specify what the plan entailed for the West Bank. The Palestinians demand the removal of settlements from both the West Bank and Gaza.

According to the report, each side would manage its own holy sites, but the overall question of Jerusalem which both sides claim would be postponed. Joint security teams would be created to supervise security and an international committee made up of U.N., European Union, American and Russian representatives would tackle the problem of Palestinian refugees and the payment of compensation.

Peres spokesman Yoram Dori said the plan would be released in coming days. "Whether Sharon agrees or not, he will have to say," Dori said.

An aide to Sharon, Raanan Gissin, refused to comment.

At a right-wing rally attended by tens of thousands in Jerusalem last week, many protesters called on Sharon to fire Peres.

In the mid-1980s Peres negotiated a deal over the West Bank with Jordan"s King Hussein, only to see it scuttled by Prime Minister Yitzhak Shamir. In 1993 he promoted secret peace talks with the PLO, which were ultimately embraced by Prime Minister Yitzhak Rabin and led to the creation of the Palestinian autonomy.