The row detonated as the pontiff appealed for Middle East peace during his annual "state of the world" address to diplomats at the Vatican, in which he described the region as a "land of fire and blood".

In the Middle East, the conflict was deteriorating on several fronts. The Israeli army collectively punished Palestinian residents in the south of the occupied Gaza Strip by flattening more than 60 homes in the poor and overcrowded Rafah refugee camp.

The destruction, which drew tepid criticism from the United States, was in retaliation for Wednesday's killing of four Bedouin soldiers from the Israeli army by two Hamas suicide gunmen, both from Rafah.

More than 100 residents fled before dawn in pouring rain and heavy mud as a dozen tanks and bulldozers smashed their houses in one of the army's largest wrecking missions of the intifada.

The picture grew bleaker with an announcement by the military wing of the Palestinian Islamic Jihad that it was scrapping an agreement with Yasser Arafat and his Palestinian Authority not to mount attacks in Israel. The group has carried out numerous suicide attacks, second only to the far larger Hamas. The statement raised the spectre of more.

Inside Israel itself, where relations with the Israeli Arab minority are at a record low, Islamic leaders were fuming over the government's decision to stop the Nazareth mosque, and blaming the Pope for making the region more volatile.

The large mosque ? a source of intense inter-religious strife and past violence ? is being erected beside the Basilica of the Annunciation, the biggest church in the Middle East. It marks the place where Christians believe the Angel Gabriel appeared to Mary.

On Wednesday, Israel's security cabinet suspended the construction, which had been approved by the previous Israeli government, after pressure from Christian leaders.

The Vatican said recently that the mosque would place one of Christianity's most important shrines in a "permanent state of siege". When the mosque's cornerstone was laid in November 1999, the Holy Land's churches closed for two days in protest, and the Pope threatened to cancel his millennium year visit to Israel.

Israel has appointed a committee to investigate another site. Islamic leaders are furious. Muslims consider the current site to mark the sacred tomb of Shihab a-Din, a nephew of Saladin, the legendary commander of the Muslim army who seized Jerusalem from the Crusaders in the 12th century.

Salman Abu Ahmed, the leader of the Islamic Movement in Nazareth in north Israel ? an Arab city of 70,000 divided between Christians and Muslims ? said the freeze amounted to a "declaration of war" on Muslims. He has accused the pontiff and other Christian leaders of influencing the decision, vowing that "the Pope won't dictate to us".