A Palestinian suicide bomber killed five people outside an Israeli shopping mall yesterday, and Israel ordered its army to hit militant leaders behind the attack.

Witnesses said the bomber smiled before blowing himself up in the coastal town of Netanya, an attack that threatened to unleash a new spiral of violence which could bury peace hopes stirred by Israel's Gaza withdrawal in September.

The militant group Islamic Jihad said it carried out the bombing to avenge Israel's recent killings of senior members.

Israeli Prime Minister Ariel Sharon approved a series of military responses to the attack, the fifth of its kind in the Jewish state since a truce was declared in February. Defence Minister Shaul Mofaz said the responses could begin overnight.

Security sources said it would include assassinations of Islamic Jihad leaders in the West Bank and Gaza, army raids in the West Bank and tightened restrictions on Palestinian movement in the occupied territory.

Mr Mofaz also said he was seeking approval to resume a policy of demolishing the homes of suicide bombers, which Israel had suspended after the start of the truce.

"We will do everything we can so that attacks like these will not occur in the future," Mr Mofaz told Army Radio. "The helplessness of the Palestinian Authority shows that they have no real intention to fight the terror organisations."

The Netanya bombing comes as Israeli Prime Minister Ariel Sharon presses ahead with a re-election campaign in which he can ill afford to look soft on Palestinian militants.

Scrambling to save the truce from collapsing, Palestinian President Mahmoud Abbas condemned the bombing as a "terrorist attack" and ordered forces to arrest suspects involved in it.

Palestinian police in the West Bank city of Jenin later detained an Islamic Jihad militant, sparking clashes between forces and gunmen. Islamic Jihad said the man was wounded in the fighting and militants helped him escape, while a Palestinian security source said its forces would continue to search for him.

"There was a boom and there was a flash. Seconds later, people were lying on the ground, some wounded and some dead," witness Yisrael Klein told Channel Two television. "The most horrific sight was the severed head of the terrorist."

The force of the blast splattered blood high on the stone and glass façade of the mall. Five people were killed and more than 40 wounded.

It was the first such bombing since October 26, when an Islamic Jihad suicide bomber killed six people in Hadera. Israel then responded with missile strikes that killed senior militants and detained dozens of Palestinian militants in West Bank raids.

Palestinians accuse Israel of provoking violence with army incursions and building in settlements in the West Bank, where Mr Sharon has vowed to keep large settlement blocs forever.

Islamic Jihad, sworn to Israel's destruction, said yesterday's bombing was to avenge "crimes by the occupation".

In Netanya, the 21-year-old Palestinian carrying a bag was challenged by police when he tried to enter the mall, a frequent target during a five-year-old Palestinian uprising.

"He looked at me and smiled, a very frozen smile, and exploded," policeman Shuki Golan told Israel Radio.

Palestinians identified the bomber as Lutfi Abu Sa'da, from a village near Tulkarm in the West Bank, and said he was the cousin of an Islamic Jihad leader wanted by Israel.