RAMALLAH, West Bank - The Palestinian Authority accused Israel's Mossad spy agency on Saturday of setting up a fake al Qaeda cell in Gaza so that Prime Minister Ariel Sharon could justify Israeli attacks in Palestinian areas.

A spokesman for Sharon called the allegation "sheer nonsense."

The Israeli leader said on Thursday that Osama bin Laden's organization had established a presence in Palestinian-ruled areas of Gaza and in Lebanon, aiming to attack Israel. He gave no further details in his comments at an Israeli media lunch.

"It is a big, big, big lie to cover (Sharon's) attacks and his crimes against our people everywhere," Palestinian President Yasser Arafat told reporters at his headquarters in the West Bank city of Ramallah.

Palestinian Information Minister Yasser Abed Rabbo pointed to an alleged Israeli plot.

"There are certain elements who were instructed by the Mossad to form a cell under the name of Al Qaeda in the Gaza Strip in order to justify the assault and the military campaigns of the Israeli occupation army against Gaza," Abed Rabbo said.

He did not elaborate, but Palestinian officials said they would present proof of Mossad involvement at a news conference on Sunday.

Sharon's allegation of a link between al Qaeda and the Palestinians marked a new stage in his equation of Israel's battle against militants leading a two-year-old uprising for statehood to the U.S.-led global war against terrorism.

Israel has named al Qaeda as prime suspect in a suicide bombing at a hotel in Mombasa, Kenya last week that killed 13 Kenyans and three Israelis and a failed attempt to shoot down with missiles an Israeli airliner taking off nearby.

The United States blames al Qaeda, a multinational Islamic fundamentalist network, for the September 11, 2001 attacks in New York and Washington.

Raanan Gissin, a spokesman for Sharon, said Abed Rabbo's comments were part of an attempt by Palestinian officials "to exonerate themselves from the allegations they are collaborating and participating with terrorists."

GAZA RAID

In what Israel called a raid to capture a wanted militant, Israeli troops backed by tanks and helicopter gunships swept into the Bureij refugee camp in the Gaza Strip on Friday, sparking a gunbattle and killing 10 people.

The bloodshed was sure to fuel more violence despite the United States' calls for calm as it prepares for possible war on Iraq.

The army said the troops met fierce resistance in the three-hour incursion. Armed men fought the soldiers in fierce street battles, but it was unclear how many of the dead were gunmen involved in the fighting and how many were civilians.

Palestinian residents said that of the nine men and one woman, a teacher employed by the United Nations, who were killed in the Israeli raid, eight were civilians and two were policemen involved in the fighting.

But the militant Islamic group Hamas said in a statement issued on Hizbollah's al-Manar television in Beirut that six of the dead were Hamas members, including the dead woman. It said two were from its Izz-el-Deen al-Qassam Brigades military wing.

In New York, United Nations Secretary-General Kofi Annan issued a statement demanding Israel exercise restraint and "refrain from the excessive and disproportionate use of deadly force in civilian areas."

State Department spokesman Richard Boucher declined to comment on the incident but said Washington has been concerned over civilian casualties that have resulted from Israeli military operations.

At the same time, he voiced support for what he called Israel's right to defend itself.

In the West Bank, Israeli troops killed an Islamic Jihad militant in an exchange of fire during a raid of a village near Jenin late on Friday, Palestinian medical sources said.

The army said that in a separate incident in the West Bank it captured a Palestinian would-be suicide bomber who had an explosives belt.

At least 1,705 Palestinians and 668 Israelis have been killed since the uprising began in September 2000 after a deadlock in negotiations for a final peace treaty.