(Updates with Palestinian government deal in principle, siege in Gaza)

By Nidal al-Mughrabi

BEIT HANOUN, Gaza, Nov 2 (Reuters) - Israeli troops killed seven Palestinians including four civilians and trapped scores of gunmen in Gaza on Thursday, witnesses said, in one of the army's biggest offensives in the strip in months.

Following Israel's operation in Gaza, witnesses said around 60 militants were holed up in a mosque in the centre of Beit Hanoun.

They said Israeli bulldozers had demolished one of its walls and troops fired stun grenades and tear gas in the area of the mosque in a bid to force the gunmen to surrender. The Israeli military said it was checking the report.

In a separate development, Palestinian officials said Hamas and Fatah had agreed in principle to form a new government.

Details were expected to be finalised soon. Some sources said the deal could see the formation of a government of "technocrats" without direct affiliation to either faction.

Two Palestinian civilians were killed late on Thursday in an Israeli airstrike just outside Beit Hanoun in northern Gaza. The military said it had targeted two rocket squads, who had fired rockets into Israel earlier, close to a launching site.

Earlier, soldiers loaded many residents into trucks and took them to the edge of Beit Hanoun for questioning, witnesses said. They said it was one of the biggest roundups of Gazans in years. The military said late on Thursday most of those held were released, with around 15 detained for further questioning.

The latest casualties, confirmed by hospital officials, bring to 15 the number of Palestinians killed since Israeli troops entered Beit Hanoun on Wednesday. Earlier witnesses had reported one woman was killed by Israeli troops but a hospital official later said she was in a critical condition.

WEAKENED PEACE CHANCES

The armed wing of the ruling Hamas Islamist movement said its fighters hit a group of Israeli soldiers with an anti-tank missile in Beit Hanoun, inflicting casualties. The army said it had no information on the attack.

Beit Hanoun, a town of 30,000 people in northern Gaza, was effectively under an army curfew, residents said.

The offensive has further weakened the chances of resuming peace talks, already minimal since Hamas took office in March after winning elections. Hamas is sworn to Israel's destruction.

Hamas has said the bloodshed could also complicate Egyptian-brokered talks aimed at arranging a swap of Palestinian prisoners in Israel for an Israeli soldier abducted by militants in a cross-border raid last June.

Thousands of Palestinians protested against the offensive in Gaza City. Prime Minister Ismail Haniyeh accused Israel of using unconventional weapons against Palestinians in Gaza.

"There are weapons used which have led to amputations of organs and have caused severe burns," he said.

An Israeli army spokesman said: "The IDF denies the allegations of the use of unconventional weapons in Gaza."

One Israeli soldier has been killed in the raid.

ARMY QUESTIONING

Relatives said one of the civilians killed on Thursday, a 75-year-old man, was shot by troops on a rooftop when he went on to the balcony of his home to bring his disabled son inside.

The army said its forces were targeting only militants.

The assault is one of the biggest in the Palestinian territories since Israel launched an offensive in Gaza to try to force the release of the captured soldier and halt rocket fire.

More than 280 Palestinians have been killed in the four-month-old offensive, about half of them civilians. Three Israeli soldiers have been killed.

Israel withdrew its army and Jewish settlers from Gaza last year after a 38-year occupation, but tension increased along the frontier when Hamas took office and rebuffed Western demands that it recognise Israel and renounce violence. That prompted the West to impose sanctions on the Palestinian government. (Additional reporting by Ori Lewis in Jerusalem)

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