By LAURIE COPANS, Associated Press Writer

JERUSALEM - If the Palestinians do not act against their militant groups, Israel will dismantle some Jewish settlements and draw a border around the rest in a "comprehensive step" that may fundamentally change the situation in the Middle East, Israel's vice premier told The Associated Press.

In violence early Friday, Palestinian gunmen ambushed an Israeli car, wounding seven passengers, two seriously, in the West Bank city of Nablus, the military said. The ultra-Orthodox Jews had been praying at a holy site where Jews believe the biblical Joseph is buried.

Israel abandoned the site in October 2000, at the beginning of three years of violence, and banned Israelis from going there. Soldiers were sent to recover the wounded.

Vice Premier Ehud Olmert, acknowledging his thinking is along the lines of that of Prime Minister Ariel Sharon , told AP Thursday that Israel will impose its own solution without a peace agreement unless the Palestinians finally move against "terror organizations."

Israel, Olmert said, will have to remove a "considerable" number settlements in the West Bank and Gaza and draw a border around the rest to bring about a separation between the Israelis and Palestinians.

Olmert's proposal falls far short of the Palestinian demand for a state in all of the West Bank, Gaza Strip  and east Jerusalem, areas Israel captured in the 1967 Mideast war. The Palestinians fear they will end up with much less land than in a negotiated agreement.

Without a peace deal, "the fire will burn, the terror will grow," Palestinian Prime Minister Ahmed Qureia warned in an interview with the Israeli daily Maariv newspaper published Thursday. It would be "a terrible mistake to try to impose a solution on us by force," he said.

But Olmert said it is up to the Palestinians to decide whether they want to negotiate an agreement.

"If they are unable to go ahead and unwilling to fight terror organizations, then there will be a unilateral, comprehensive step taken by the state of Israel and I think that may indeed change fundamentally the situation in the Middle East for a considerable amount of time," Olmert said.

"If there is no agreement, I believe it is incumbent on Israel to take unilateral steps and to create a unilateral separation between us and the Palestinians," said Olmert, a Sharon confidant.

In the most detailed outline yet of a go-it-alone plan, Olmert said "it will be a lot different from the reality that exists today" and most Palestinians would no longer live under Israeli rule.

Israel, he said, will "definitely" not withdraw to the 1967 lines, and will keep "the united city of Jerusalem."

"A considerable amount of settlements and a considerable number of people will have to move into different areas," Olmert said.

A removal of settlements would be a dramatic departure for Sharon, who has been the settler movement's leading patron for a quarter century.

But Sharon has spoken repeatedly about possible unilateral moves, and was to deliver a major policy speech at a conference on national security next week.

"It is an entire policy that is being planned," said Uzi Arad, the conference organizer and former security adviser to ex-premier Benjamin Netanyahu.

Even before Sharon floated the idea of unilateral steps, Israel began building a separation barrier whose completed portions — about 100 miles run near the 1967 lines, but in other areas is to cut deep into the West Bank.

Israel says the barrier is to keep out militants who have killed hundreds of Israelis since 2000, while the Palestinians call it a land grab.

"You cannot build a fence on our land, to cage us like chickens and hope all will be well," Qureia told Maariv.

In Washington, Secretary of State Colin Powell gave a boost to Israelis and Palestinians who favor a compromise peace deal by meeting with the authors of one such private initiative, former Shin-Bet security chief Ami Ayalon and Palestinian intellectual Sari Nusseibeh.

In an interview to be broadcast Sunday on the CBS-TV program "60 Minutes," Ayalon warned that the barrier would cause more Palestinian violence.

"The more Palestinian territory we are annexing by building this fence, the more violence we will see in the future," he said.

Powell planned a meeting on Friday with Israeli Foreign Minister Silvan Shalom.

In Rome, donor nations put new pressure Thursday on the Palestinians to crack down on militants and clean up their finances, suggesting that future aid could be in doubt if there is no improvement, diplomats said.

The donors, at their annual meeting, also criticized Israeli travel restrictions on Palestinians during the three years of violence since peace talks collapsed. Aid workers say the restrictions and other military operations hinder their efforts and wreck development projects.

International aid is the lifeblood of the Palestinian economy, accounting for 60 percent of the annual budget of the Palestinian Authority, which seeks about $1.2 billion for its 2004 budget.

The World Bank estimates that the Palestinians could fall $400 million short of what they have requested.

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