Peres, Arafat lunch with Mubarak and Aznar

Associated Press WriterPOLLENSA, Spain (AP) -- Palestinian leader Yasser Arafat and Israeli Foreign Minister Shimon Peres met Friday at an economic conference, the first high-level contact between the two sides in more than a month.

The two were joined by Egyptian President Hosni Mubarak and Spanish Prime Minister Jose Maria Aznar for lunch at the start of the conference.

It wasn't clear if Peres and Aznar would meet one-on-one as well, but the luncheon was the first such contact since Sept. 26, when the two leaders called for implementation of a cease-fire to stop a year of conflict. The truce never fully took hold.

Palestinian Cabinet minister Nabil Shaath said Peres and Arafat would discuss a cease-fire, "ways to calm the situation and resume the negotiations."

Israel continues to hold parts of four West Bank towns it seized after Palestinian militants assassinated Cabinet minister Rehavam Zeevi on Oct. 17. Defense Ministry spokesman Yarden Vatikay said, "We are waiting for the Palestinians to take responsibility for the security in those areas."

Earlier, Israeli Prime Minister Ariel Sharon said Peres and Arafat would not conduct negotiations, but he rejected calls from party activists to ban his foreign minister from attending the conference.

"Israel cannot allow itself to be absent from international events," Sharon replied, showing anger. "We are not conducting political negotiations," he repeated several times to skeptical activists. Sharon said that Peres and Arafat could meet in a corridor and shake hands.

Before leaving for Spain, Peres also said he would not negotiate with Arafat. Gideon Meir, a senior Israeli Foreign Ministry official, said, "First, Peres and Arafat must talk about how they're going to bring an end to this violence."

However, in an interview published Friday, Peres took issue with Sharon's basic tenet that there can be no negotiations as long as violence continues. "I would conduct negotiations under fire, because it is impossible to stop fire with fire," Peres told the Israeli daily Maariv.

Peres also said he favors dismantling some Jewish settlements now. "I am not doing any favors to the Palestinians," he said. "There are some settlements that draw fire and have no future." He said the location of some settlements makes it difficult for Israel to draw a map that would offer both peace and security.

Sharon has said he would offer the Palestinians a state when negotiations resume, but has not said he would dismantle any of the nearly 150 Jewish settlements in the West Bank and Gaza Strip.

British Prime Minister Tony Blair held separate talks with Sharon and Arafat on Thursday, and later said he had modest hopes of restarting genuine negotiations in the Middle East.

"I think this is the possibility," Blair said in a television interview on a flight to Genoa, Italy. "I wouldn't put it any higher than that -- that we can prepare the ground to move the Middle East peace process forward."

After his talks with Blair, Sharon announced that he and Peres would head the Israeli team when negotiations resume with the Palestinians.

However, Shaath charged that Sharon is trying to sabotage peace efforts. "He is implementing policies of assassinations, killing and aggression on the ground," Shaath said.

Arafat said he is committed to negotiations "to achieve a just and lasting peace for all the people of the region."

In the West Bank city of Nablus, about 3,000 people marched in a funeral procession Friday for two activists from the militant Hamas, killed Thursday when Israeli helicopters fired rockets at their car.

Standing on a car, Fayek Abu Eisha, the young son of one of the dead Hamas activists, shouted into a microphone, "I will avenge the blood of my father." Israel said the two were planning a suicide bomb attack inside Israel.