Israel kills 7 in Gaza; Hamas says soldier alive

GAZA, July 7 (Reuters) Israeli aircraft and tanks today killed seven Palestinians in clashes with gunmen across the northern Gaza Strip, drawing European Union accusations that the Jewish state was using excessive force.

In a possible attempt to find a way out of the crisis, an Israeli cabinet minister suggested Palestinian prisoners might be released as a ''goodwill gesture'' if militants first freed a captured soldier and ended rocket attacks.

The governing Hamas Islamist movement rejected the apparent overture but said for the first time that Corporal Gilad Shalit was alive, and demanded negotiations for his release.

The EU accused Israel of ''disproportionate use of force'', a day after 20 Palestinians and one soldier were killed in the bloodiest day of fighting since 2004.

The army has pushed deep into northern Gaza, taking over ruined Jewish settlements that Israel abandoned last year, in an offensive to bring home Shalit and end rocket attacks.

The incursion has piled pressure on the Hamas government, already reeling from a Western aid embargo. Any lingering hope peace talks could be revived has been dashed by the bloodshed.

Among today's violence in which medics said militants and civilians were killed, an air strike in northern Gaza killed two gunmen. The army said it had targeted armed men.

Witnesses said tank fire killed one man near the northern town of Beit Lahiya, scene of the worst fighting yesterday.

Israeli Prime Minister Ehud Olmert ordered tanks into Gaza after Hamas militants fired rockets into a major Israeli city for the first time. The offensive began 10 days ago with the main goal of freeing Shalit, captured in a raid on June 25.

In a statement, Hamas said it was not asking Israel ''for the impossible'' over the 19-year-old tank gunner. Hamas, whose armed wing took part in Shalit's abduction, has demanded Israel free 1,000 prisoners in exchange for his release.

''His treatment is being done well and in a humanitarian way in accordance with the orders of our religion,'' the group said.

''We stress that negotiations are the only way out of this case and the sole way to preserve the life of the soldier and secure his safe return to his family.'' DIPLOMATIC SOLUTION? Diplomatic talks led by Egypt have failed to secure Shalit's release, but an Israeli minister indicated a possible shift in Israel's refusal to free prisoners in exchange.

Public Security Minister Avi Dichter said if Shalit was freed and rocket fire and other attacks halted then Israel might be ready to ''release prisoners to fulfil a goodwill gesture''.

A senior Palestinian official said such a scenario was discussed on Thursday by a member of Olmert's office and an aide to moderate Palestinian President Mahmoud Abbas.

Hamas lawmaker Mushir al-Masri rejected the idea.

''There is no talk at the moment about the missing soldier, we are talking about 30 Palestinian martyrs,'' he said.

Israeli Interior Minister Roni Bar-On, speaking on Israeli television, said no prisoners would be freed.

''There will be no negotiations. There will be no release of prisoners,'' Bar-On said, adding he had just spoken to Olmert.

Despite taking over what amounts to a buffer zone inside Gaza, Israel says there is no plan for long term re-occupation of territory given up last year after 38 years of military rule.

In defiance of Israel's incursion, militants fired at least five homemade rockets into the Israeli border town of Sderot on Friday, with one strike wounding three people.

At least 37 Palestinians, the majority of them militants, have been killed since the Israeli offensive began, according to Palestinian medics and officials.

''The EU condemns the loss of lives caused by disproportionate use of force,'' a statement by the Finnish EU presidency said. Israel tends to resist foreign pressure except from its main ally, the United States.

Reuters SY VP0000