JERUSALEM (AP) Prime Minister-elect Ariel Sharon and Ehud Barak agreed on formation of a unity government yesterday, with Barak"s party getting the key defense portfolio. Israeli media said Barak would be the new defense minister.

Sharon and Barak met for two hours yesterday and Barak who was resoundingly defeated by Sharon only last week accepted Sharon"s offer of the top Cabinet post, Israeli TV and radio reported.

Barak"s office said in a statement that a decision was made to set up a unity government, and that Barak"s Labor party would receive the defense and foreign ministries. Officials close to Barak were not available for comment on the media reports of his agreement to stay in government.

Violence persisted yesterday as two mortar shells fired by Palestinians fell on a Jewish settlement in the Gaza Strip, and Israeli soldiers killed a Palestinian who was trying to infiltrate another settlement there.

No casualties were reported in the mortar attack at Netzarim, an isolated enclave in central Gaza. The settlement had come under mortar attack twice before. A Palestinian police officer whom Israel believed to be responsible for the earlier attacks was killed Tuesday by Israeli helicopters firing rockets.

The Palestinian killed near Kfar Darom, another isolated settlement in Gaza, was identified as Nasser Hassanat. He was a member of a Palestinian security force, according to documents he carried.

Funerals for young Israeli soldiers and a civilian eight were killed Wednesday by a Palestinian bus driver weighed heavily on politicians seeking a coalition between Sharon"s Likud party and Labor.

Sharon, who cannot take office until he forges a majority coalition, was confident. "I will set up a unity government," he told reporters before meeting European Union peace envoy Miguel Moratinos. Sharon said it would "enable us to reach security and peace."

Other prominent Israelis had harsh words for the Palestinians. President Moshe Katsav, visiting the family of a soldier killed in an earlier attack, said Arafat incites Palestinians to attack Israel, while talking about peace at the same time.

"That"s Yasser Arafat, with his conflicting messages and dual morality and two-faced behavior," Katsav said.

A leading rabbi recommended that Israel seize the Palestinian town of Bethlehem as retaliation for gunfire at a Jewish neighborhood in Jerusalem and Rachel"s Tomb, a Jewish holy site near Bethlehem.

Rabbi Shalom Mashash, chief Sephardic rabbi of Jerusalem, was quoted by a Jewish weekly as saying that Israel gave the Palestinians control of towns for peace. But since there was no peace, Israel should take back Bethlehem, he said.

Sharon has said he would not order the capture of areas under Palestinian rule.

Israelis were in a somber mood as reports of funerals dominated the news. In the coastal city of Ashkelon, weeping parents buried four young soldiers one after the other at the military cemetery under gray, drizzly skies.

They were among the eight killed Wednesday when a Palestinian bus driver crashed into a crowd of soldiers and civilians at a bus stop south of Tel Aviv. The driver, Khalil Abu Olbeh from Gaza City, was shot and captured after a highway chase.

In response, Israel clamped its toughest quarantine yet on the West Bank and Gaza, banning Palestinians from entering Israel or leaving for other countries, limiting internal travel, enforcing a sea blockade and closing the Palestinian airport.