JERUSALEM, Oct. 19 (AP)--Israeli troops seeking to rescue wounded Jewish settlers waged a deadly battle with Palestinian gunmen for five hours Thursday on a rocky West Bank hill. Two deaths were reported and the fighting threatened to scuttle a U.S.-brokered cease-fire barely a day into its life.

The battle on Mount Ebal overlooking Nablus killed one Palestinian and wounded at least five others. One settler died and five others were wounded.

The dead settler bled to death waiting for army rescuers, who could not breach the heavy gunfire, security officials said. Settlers said the wounded were in moderate to serious condition.

Two army attack helicopters hovered over the scene, and armored personnel carriers were ready to move in. Settlers called on the army to unleash the ``full power'' of the attack helicopters, an apparent reference to anti-tank missiles.

The army resisted using the missiles, permitting the helicopters to limit fire to their machine-guns. The use of missiles would greatly endanger the cease-fire extracted by President Clinton through two sleepless days of negotiations in Egypt earlier this week. Clinton and Egyptian President Hosni Mubarak had warned that a cease-fire collapse could lead to a wider regional war.

Each side had widely differing accounts of how the battle started. The settlers--numbering about 40--insisted they had prior army permission to climb the hill, known locally as ``the accursed mountain,'' so they could observe the fate of a Jewish holy site evacuated by Israeli troops under fire two weeks ago.

They said Palestinian gunmen from the nearby Askar refugee camp opened fire on the group, without provocation.

``Under fire for five hours straight,'' said Elazar Mizrahi, speaking to Channel Two TV from a cellphone, the staccato of automatic fire audible in the background. ``There are still gunshots. Hiding. Others 30 meters from me. We came to tour the area. We came with army escort...I'm hiding behind a rock. I can't leave here.''

Army spokesmen said they were trying to establish whether the settlers indeed had an escort and whether local commanders had approved the tour, but the army has published several announcements in recent days banning such outings. An army spokesman said the settlers never opened fire, and that an army jeep had rushed to the scene soon after the Palestinians opened fire.

Palestinians said the battle broke out when settlers descended the hill toward the refugee camp and opened fire on Palestinians harvesting olives, without provocation.

The battle erupted as each side took steps to build up goodwill after the Egyptian summit, brokered with assistance from Jordan, the United Nations and the European Union in addition to the efforts of Clinton and Mubarak.

The 48-hour deadline for a total cease-fire, set to expire midday Friday, would have led to a two-week recovery program aimed at getting negotiators back to the table after the recent wave of violence. More than 100 people have died, all but about 10 of them Palestinians.

Israeli authorities have already lifted the internal closure on Palestinian areas, which allowed Palestinians to resume travel between towns inside the West Bank and Gaza.

They have also opened border crossings to Egypt and Jordan, and goods again have started to flow between Gaza and Israel. In addtion, Palestinians also were allowed to reopen their airport in Gaza after a 10-day closure.

For their part, the Palestinians have begun to re-arrest some of the freed Islamic militants who have called for Israel's destruction. The Palestinian leadership also issued ``strict orders'' to observe the truce, and officials at Palestinian radio said they had received instructions to tone down their anti-Israel rhetoric.

Also, the two sides have held secret meetings between their security chiefs, chaired by the CIA, aimed at restraining the Palestinian militias that have led the attacks on the Palestinian side.

Despite the progress, each side accused the other of not doing enough to make the cease-fire a success--even before the gun battle erupted.

``I don't see things calming down,'' Israeli Acting Foreign Minister Shlomo Ben-Ami said on Israel army radio. ``I personally see something more serious happening in the Palestinian Authority which raises a major question mark. Is (Palestinian leader Yasser) Arafat in control?''

A top aide to Arafat, in Cairo getting ready for an Arab summit, said Israel's efforts were bare-bones.

``Israel wants to kill the Palestinian people and to keep them under siege, and to put them under pressure that they cannot bear,'' Nabil Shaath told reporters.

Earlier Thursday, in the northern Gaza Strip, Palestinian stone throwers clashed with Israeli soldiers, who responded with tear gas. In Hebron in the West Bank, similar clashes erupted after Palestinians found graffiti insulting the prophet Muhammad on walls near the Jewish enclave. No injuries were reported.

Two Palestinian policemen died in an apparent gas explosion at the Bethlehem headquarters of Palestinian leader Yasser Arafat's elite Force 17 unit. A police spokesman said the explosion ``was from our stores and has nothing to do with the clashes.''

Police were evacuating wounded and ammunition following the explosion, which shattered the windows of a jeep in the police courtyard.