JERUSALEM, Nov. 1 (AP)--Israeli combat helicopters battered a West Bank village Wednesday to rescue wounded Israeli soldiers trapped by Palestinian gunfire, a clash that left two Palestinians dead. But several gun battles didn't scuttle the highest-level meeting between the two sides since fighting began 35 days ago.

Israel's elder statesman, Shimon Peres, met with Palestinian leader Yasser Arafat at Arafat's Gaza office late Wednesday, said Palestinian officials who spoke on condition they not be named.

Israeli Prime Minister Ehud Barak said at a brief televised news conference that Peres would not negotiate with Arafat. Rather, he said, he would tell the Palestinian leader that Israel would not accept continued violence.

"I think that even when there is shooting, we need to talk," Peres told Israel army radio earlier Wednesday.

Barak convened his security Cabinet for an emergency session in response to intense gun battles. Before the session, he said Israel would not tolerate "grave escalation initiated by the Palestinian Authority."

In addition to the two Palestinians killed in the West Bank village of Al Khader, near Bethlehem, three others died Wednesday at the Karni Crossing between Israel and the Gaza Strip. There was also fighting at a third site, near the Jewish neighborhood of Gilo on the outskirts of Jerusalem.

More than 150 people, most of them Palestinian, have died in clashes over the past five weeks, and the military has predicted the fighting could go on for months--and could escalate. On Wednesday, a senior military official said Israel was calling up its army reserves.

About 1,000 reservists have been activated already, and by the beginning of December, all the reserve forces will be called up to serve stints in the West Bank and Gaza, said the official, who insisted on anonymity.

The fighting in Al Khader began when Palestinian gunmen opened fire on Israeli troops posted nearby, the Israeli army said. A Palestinian policeman was among the two Palestinians killed, and four Israeli soldiers were wounded.

Palestinian shooting prevented Israeli medics from reaching the soldiers, prompting the army to bring in two helicopter gunships that raked the village with machine gun fire. The wounded soldiers were evacuated after nearly an hour and taken to a Jerusalem hospital.

Scores of Al Khader residents, trapped on the main road during the shooting, huddled close to a cement wall, and one man sought cover under a car. A Palestinian boy, about 12 or 13 years old, screamed in panic when he heard a helicopter gunship approach.

Bullets also sprayed the entrance to the Yamamah Hospital on the outskirts of Al Khader. An injured Palestinian brought to the clinic's door in a private car crawled out of the vehicle as those accompanying him ran for cover. The injured man collapsed and eventually was carried to safety indoors.

Palestinian gunmen also attacked the Gilo neighborhood on the southern edge of Jerusalem from positions in the adjacent West Bank town of Beit Jalla. The gunmen hit several homes and a kindergarten, with one youngster and several adults still inside. There were no reports of injuries.

Israel responded with machine gun fire from the ground and from helicopters. Troops also fired several anti-tank missiles at Beit Jalla. The fighting lasted more than three hours.

In the Gaza Strip, more than 20,000 Palestinians joined a funeral for five of seven Palestinians killed in the past two days at the Karni crossing. "Goodbye, martyrs, we will meet in paradise," the crowd chanted. "We will take revenge against the Israelis, and this will happen soon."

Peres, who as the architect of Israeli-Palestinian peacemaking has spent many hours negotiating with Arafat, said he did not have high expectations for his meeting.

Still, he said he expected Arafat to give a clear commitment to a truce agreement arranged at an Oct. 17 Mideast summit by President Clinton. That gathering was attended by Barak and Arafat, but the two refused to meet face-to-face.

Also Wednesday, Palestinian envoy Saeb Erekat left for New York, where he was to meet with U.N. Secretary-General Kofi Annan and Secretary of State Madeleine Albright on Thursday. Israeli Foreign Minister Shlomo Ben-Ami was also expected to hold talks with Albright in the next few days.

Erekat said he was carrying letters from Arafat to Annan and Clinton with a request that the United Nations send a force to protect Palestinian civilians, and for the establishment of an international inquiry into the causes of the violence.

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