JERUSALEM -- In the deadliest day of fighting in 17 months, Israel raided Palestinian towns and refugee camps Friday, while a Palestinian gunman opened fire on a Jewish settlement. Amid the carnage, Israeli Prime Minister Ariel Sharon hinted at new flexibility in reaching a truce.

Thirty-nine Palestinians were killed in Israeli raids on towns and refugee camps in the West Bank and Gaza Strip. Six Israelis were slain by Palestinians.

The U.S. administration, which has announced a new Mideast mediation mission, demanded Friday that Israel immediately halt the strikes.

Israeli troops in a Gaza village and two West Bank refugee camps used machine-guns, tanks and helicopters to attack the Palestinians positions.

"The sky was raining with bullets from all directions," farmer Hatem Abu Teir said of the Israeli assault on the Gaza village of Khouza, where 16 Palestinians, including a general, were killed. The army called Khouza a "center of terrorist activity."

In the West Bank refugee camp of Tulkarem, dozens of Palestinian gunmen were pinned down in alleys and in homes, surrounded on all sides by Israeli forces, including helicopter gunships firing from above. Israeli troops called on the gunmen over loudspeakers to surrender. About 250 Palestinians were rounded up in a local school.

Israeli troops barred Palestinian ambulances from entering the camp to retrieve casualties, and a count of six Palestinians killed in the camp -- including a 9-year-old boy -- was expected to climb. An Israeli soldier was also killed in the fighting.

In the Jewish settlement of Atzmona in Gaza, a Palestinian gunman killed five Israeli teen-agers during a 15-minute rampage that began just before midnight Thursday.

19-year-old assailant

The assailant, a 19-year-old member of the Islamic militant group Hamas, emptied nine ammunition clips and threw six grenades before he was shot dead by Israeli troops. Four of the teen-agers were killed while studying religious texts, and the fifth was burned to death by a grenade hurled into his dormitory. The five were slated to become army officers -- likely in an elite unit.

In Jerusalem, police caught a Palestinian man carrying large amounts of explosives. Police said officers killed the man as he was about to detonate the device.

Friday saw the highest one-day death toll to date -- and it capped the bloodiest week since September 2000, with 111 Palestinians and 36 Israelis killed in the past seven days. The next deadliest day was Dec. 2, when 24 people were killed, including 15 Israelis in a suicide bombing.

Meanwhile, sometimes intricate diplomatic moves were apparently linked to a Saudi Peace proposal made last month. Crown Prince Abdullah suggested Arab readiness to make peace with Israel if it withdrew to pre-1967 Mideast War borders, ceding all of the West Bank, Golan Heights and East Jerusalem.