RAFAH, Gaza Strip -- Israeli forces trying to demolish smuggling tunnels fought gunmen for hours Friday in the largest raid in six months in the Rafah refugee camp, a frequent battlefield in the Gaza Strip. Seven Palestinians were killed and 55 were wounded, and an Israeli soldier was also hurt.

In the West Bank, the survival of Palestinian Prime Minister Ahmed Qureia's proposed Cabinet was in question after the legislature postponed a vote of approval amid intense political wrangling Thursday. An exasperated Qureia told Yasser Arafat he no longer wants the job, but stopped short of formally resigning.

Israel's raid of the Rafah refugee camp -- code-named "Operation Enchanted Day" -- began around midnight Thursday and could last several days, military sources said. It was part of stepped-up military activity in response to last weekend's suicide bombing that killed 20 Israelis in a restaurant in the port city of Haifa.

Military officials said on condition of anonymity that Israel had intelligence warnings that Palestinians planned to use tunnels to smuggle in anti-aircraft missiles -- weapons that could have a strategic impact on the three-year conflict.

Earlier this week, Defense Minister Shaul Mofaz ordered two more battalions into the West Bank and Gaza Strip, and decided to call up four battalions of reserve soldiers, or about 1,000 troops, after the Sukkot holiday, which ends in a week.

Government spokesman Dore Gold said Israel was pursuing militant groups and their infrastructure because the Palestinian leadership was not.

"In uncovering the vast network of arms smuggling tunnels in the area of Rafah, Israel is compelled again to do the work that the Palestinian Authority is supposed to do," Gold said.

Gunfights between soldiers and Palestinian gunmen continued Friday.

Seven Palestinians, including an 8-year-old boy, were killed and 55 people were wounded by Israeli fire, Palestinians said. Most of the casualties occurred when a helicopter fired a missile at crowd, they said. The military said the missile targeted a group of gunmen.

An Israeli soldier was slightly wounded.

Dr. Ali Mousa, director of Rafah's small Najar Hospital, said two of the dead were identified as belonging to militant groups and at least two others were civilians.

Najar Hospital did not have enough medicine and other supplies for the victims, and seriously wounded patients could not be transferred to other hospitals because of Israeli travel restrictions, Mousa said.

The Israeli army bulldozed three houses it said gunmen were firing from near the border. Thunderous explosions were heard, and the military said Palestinians hurled hand grenades and fired anti-tank missiles at the forces.

The army positioned snipers on rooftops, witnesses said, and fired a tank shell at an electricity transformer, plunging the camp into darkness.

Armored vehicles and attack helicopters swept into the Rafah camp on Gaza's border with Egypt, joined by special forces, including engineering units with dogs trained to find tunnels.

Military officials said Palestinians were trying to get shoulder-held Stinger missiles that could shoot down attack helicopters and civilian aircraft, and were trying to smuggle Katyusha rockets that could hit Israeli cities near Gaza.

The officials provided no evidence to back up their claims, but said Egypt was not trying to stop the smuggling.

The military said earlier it had destroyed 33 smuggling tunnels in the area so far this year. By Friday afternoon, the army said it found two tunnels.

Palestinian Cabinet Minister Saeb Erekat condemned the Gaza raid, saying such violence contributes to the instability that is undermining efforts to get a new Palestinian government in place.

About the internal Palestinian political wrangling, Erekat said, "We don't look good. At a time when the Palestinian people are suffering, the last thing we need is an internal crisis."

During a Thursday meeting at Arafat's headquarters, Qureia suggested he no longer wanted to be prime minister, just four days after taking office, officials said.

"There are serious differences, but it did not reach the point of resignation," Arafat aide Nabil Abu Rdeneh said outside Arafat's headquarters.

Qureia's success is key to efforts to salvage the stalled U.S.-backed "road map" peace plan, which outlines a path to ending three years of conflict and forming a Palestinian state by 2005. Thursday's public embarrassment seemed to bode ill for his chances of survival.

A vote on the eight-person emergency Cabinet was rescheduled for Saturday.