JERUSALEM, Nov. 16 (AP) - Israeli helicopters rocketed West Bank offices of Yasser Arafat's Fatah movement and other targets early Thursday, killing a German man and injuring 17 Palestinians as the worst Israeli-Palestinian fighting in decades continued.

Israeli Prime Minister Ehud Barak, meanwhile, announced that he has stopped the transfer of millions of dollars in tax revenue Israel collects monthly for the Palestinians, saying he wanted to pressure Arafat to abide by earlier truce agreements.

He also told Israelis on Thursday to prepare for a long fight with the Palestinians. Barak took to the airwaves as day broke to defend his military policies and tell his people that the conflict could not be cut short by a bloody demonstration of military might.

Clashes between Palestinian rock-throwers and Israeli troops erupted after funerals Thursday, including that of an 11-year-old Gaza boy who died of Israeli bullet wounds he sustained earlier. The boy's death Thursday brought to aat least 221 the number of people killed in seven weeks of confrontation. The vast majority of the victims have been Palestinians.

Shots were fired Thursday at an Israeli police station on the main shopping street in the Arab part of Jerusalem, witnesses said. Four Israeli border policemen returned fire, sending passers-by fleeing. There were no immediate reports of injuries.

Despite the violence, diplomatic efforts continued.

Arafat met with Dennis Ross, the outgoing U.S. Mideast envoy, for nearly two hours in Gaza City. The Palestinian leader said President Clinton, whose term ends in two months, "is insisting to achieve something before his departure."

Asked whether there could be a peace agreement before Clinton leaves office, Arafat said: "We hope so."

However, senior Palestinian officials have said confrontations with Israel would continue, even if talks resume.

Barak, who met with Ross late Wednesday, said he would return to talks only after violence was drastically reduced. "I simply said to him: Mr. Ross, go to the other side and make it clear that the state does not accept any dictates by violence from anyone," Barak told Israel radio.

Barak brushed off criticism at home that the army's response to Palestinian shooting attacks was not tough enough. "If we thought that instead of 200 Palestinian fatalities, 2,000 dead would put an end to the fighting at a stroke, we would use much more force," Barak said.

The overnight missile attacks on Fatah offices in the West Bank towns of Salfit, Tulkarem and Hebron, as well as an armory in Jericho, came in response to Palestinian shooting ambushes earlier this week that killed two Israeli civilians and two soldiers.

Israeli troops also fired rockets and large-caliber machine guns at the West Bank town of Beit Jalla after Palestinian gunmen there fired on the nearby Jerusalem neighborhood of Gilo.

Harald Fischer, 68, a German chiropractor, was killed in the Israeli attack on Beit Jalla. German Foreign Minister Joschka Fischer, who is not related to the victim, said he was horrified by the killing and demanded that Israel conduct an immediate investigation. Israel had no comment.

The chiropractor's Beit Jalla home came under fire during intense fighting Wednesday night, and his family sought shelter under the stairwell. However, Fischer left his home at one point to try to help wounded neighbors, said his Palestinian wife, Norma.

Fischer was killed just outside his home. Palestinian doctors said the fatal injuries could have been caused either by large-caliber bullets or rockets. A wall near the spot where he died was pocketed with .50 caliber machine gun bullets. Fischer's left leg was severed and his upper body riddled with bullets.

Fischer, who is originally from Gummersbach near Cologne in western Germany, moved to Beit Jalla in 1981 and was a father of three children.

He was buried in Beit Jalla on Thursday, with 2,000 people joining the funeral procession led by about 30 clergymen. "Christians and Muslims, all of us against the Israeli aggression," the crowd chanted.

In Salfit, a 30-year-old Palestinian, Rizzek Ishtayeh, lost his left leg and was critically wounded when an Israeli rocket struck his bedroom, his family said. The Ishtayeh home is adjacent to the Fatah office in Salfit that was shelled by Israel.

Israel believes that Fatah's Tanzim militia is behind most of the shooting attacks on Israeli army posts and Jewish settlements in the West Bank and Gaza. In the past two days, Israeli undercover troops have arrested more than a dozen Tanzim gunmen.

The missile attacks, described by the army as pre-emptive, were approved in a special session of Israel's security Cabinet late Wednesday.

The suspension of the Israeli money transfers to the Palestinian Authority came as a further blow to the battered Palestinian economy. About 125,000 Palestinians working in Israel - about one-sixth of the Palestinian work force - have been unemployed since Israel sealed off the West Bank and Gaza shortly after the fighting started Sept. 28.

Earlier this week, Israeli troops also blockaded Palestinian towns and villages, paralyzing life in the West Bank and Gaza.

Israel had been transferring an average of $60 million a month in collected tax revenues, including money withheld from the salaries of Palestinian workers in Israel, to the Palestinian Authority.

In the past six weeks, Israel has passed along only about $7.5 million, said Salam Fijad, a representative of the International Monetary Fund in the Palestinian areas. Fijad said the taxes collected by Israel make up about two-thirds of the total revenues of the Palestinian Authority.

Arafat said that the withholding of the funds is "part of the Israeli war against us."

Barak acknowledged that he was trying to pressure the Palestinians. "The transfer of funds has been stopped as part of our demand that the other side, too, will abide by agreements."

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