(Adds militants truce proposal)

By Nidal al-Mughrabi

GAZA, Nov 23 (Reuters) - Israeli forces killed seven Palestinians, including a top militant commander, in raids in the northern Gaza Strip on Thursday while a 57-year-old grandmother blew herself up near soldiers.

The Israeli operations came a day after the government decided to press on with a five-month-old offensive in Gaza but not order a massive assault to curb an upsurge in Palestinian militant rocket strikes on the Jewish state.

Later, Palestinian factions proposed offering a limited ceasefire with Israel by saying they would stop firing rockets from the Gaza Strip if Israel halts its military actions in Palestinian areas, a militant leader said.

It was the first time that all Palestinian factions and militant groups had agreed on a common proposal. The offer did not include other attacks such as suicide bombings.

But an Israeli government official swiftly rejected the offer, demanding that militants lay down their weapons first.

"For the good of the national Palestinian interest ... there is a position supporting calm (a ceasefire) by stopping rocket fire in return for an end to the aggression against our people in Gaza and the West Bank," Khader Habib, a leader of the Islamic Jihad group said.

Palestinian President Mahmoud Abbas said in a statement issued on the Web site of the official Palestinian news agency WAFA, that rocket attacks by militants were counter-productive and that they gave Israel a "pretext to attack Palestinians."

The armed wing of the governing Hamas movement claimed responsibility for the Gaza suicide bombing and identified the woman bomber as Fatima al-Nejar.

The army said soldiers spotted her approaching them with an explosive device near the Jabalya refugee camp and threw a stun grenade at her. The woman detonated the device, killing herself, the army said. Three soldiers were slightly wounded.

Her family said she had nine children and some 30 grandchildren. She was the first known Palestinian grandmother to attempt a suicide bombing against Israelis.

An Israeli air strike on a car killed three militants from the Popular Resistance Committees (PRC), including Fayeq Abu Al-Qumsan, who was the militant group's commander for northern Gaza, residents said. The PRC has been behind many of the recent rocket attacks against Israeli border towns.

Israeli soldiers also fought gunbattles with gunmen, witnesses said. Hospital officials said a 20-year-old civilian man was shot dead by Israeli troops east of the town of Beit Lahiya. The army said it was checking the report.

Residents said troops backed by tanks earlier thrust into Beit Lahiya. Tanks firing machineguns stormed a housing project, killing a 19-year-old man, hospital officials said.

Israel said troops were operating around Beit Lahiya, but denied forces were in densely populated areas.

Four Israeli soldiers were wounded by anti-tank missiles, the army said.

UNITY TALKS?

Residents said the incursion into Beit Lahiya was one of the biggest since Israel launched its offensive in late June after gunmen, including Hamas members, abducted a soldier in a cross-border raid from Gaza.

The objective was then broadened to target rocket-launching squads, who have killed two Israelis in the past week. Militants say the rockets are a response to army assaults.

Israel has killed nearly 400 Palestinians in Gaza, about half of them civilians, since it began the offensive, hospital officials and residents say. Three soldiers have been killed.

On the Palestinian political front, Haniyeh met Abbas for a second round of unity government negotiations on Thursday night, officials said.

In his statement, Abbas said that three conditions must be reached before announcing the formation of the unity government:

A mutual ceasefire, the release of Palestinian prisoners in Israeli jails together with the release of Israeli army corporal Gilad Shalit, who was abducted by militants in a cross-border raid in June, and the release of Palestinian ministers and lawmakers held in Israeli jails. (Additional reporting by Ori Lewis and Corinne Heller in Jerusalem and Mohammed Assadi in Ramallah)

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