JERUSALEM -- Israeli soldiers killed two Palestinians in a clash in the Gaza Strip on Wednesday, and in the West Bank soldiers started dismantling illegal Jewish settlement outposts.

Israeli Prime Minister Ariel Sharon warned, meanwhile, that "clouds of war" were gathering over the region, a reference to a possible U.S. attack on Iraq.

The Gaza clash developed in a place where there are daily confrontations -- the Gaza-Egypt border, which is patrolled by Israel under the largely ignored interim peace accords. Palestinian witnesses said soldiers in tanks opened fire with machine guns at Palestinians throwing rocks at them from the Rafah refugee camp, killing two and wounding 17. The Israeli military said soldiers returned fire after gunmen shot at them.

Sharon visited an Israeli army base in the south of Israel and praised soldiers for defending "against the Palestinian and Arab terror."

In a reference to the growing likelihood that the United States will attack Iraq, Sharon said, "There are clouds of war that are casting a shadow over our region." Reading from a prepared text, he said, "I hope they won't reach us. But we have to know that if Israel is attacked, it will protect its citizens."

In the 1991 Gulf war, Iraq fired 39 Scud missiles at Israel. Under intense U.S. pressure, Israel did not retaliate. This time, Israeli leaders have said they would hit back if the country suffered many casualties from an Iraqi attack.

Meanwhile, Israeli soldiers dismantled two illegal Jewish settlement outposts in the West Bank, angering settlers but not satisfying critics, who say that there are more than 100 illegal points on hilltops all over the West Bank. Officials said a third outpost was taken down, but it could not be confirmed. All the sites were uninhabited.

Palestinians charge that all the settlements are illegal encroachments on land they claim for a state.

Settler leaders accused Defense Minister Binyamin Ben-Eliezer of targeting the outposts for internal political reasons. Ben-Eliezer faces a tough battle for re-election as party chief in November, and his detractors allege that he moved against the outposts to win votes from the dovish wing of the party.

Dozens of outposts have been established by settlers on isolated West Bank hilltops since 1998, in hopes of thwarting the transfer of land to the Palestinians in a future peace deal.

The enclaves are typically a few miles away from established settlements and usually consist of shipping containers, mobile homes, a generator and a water tank. Soldiers have been deployed to guard the populated enclaves.

As foreign minister in 1998, at a time when his government was engaged in land-for-peace talks with the Palestinians, Sharon encouraged settlers to grab more hilltops.

The Settlers' Council said dismantling the outposts was a "reward for terror." Many were set up at sites of Palestinian attacks on Jewish settlers.

The army has given settler leaders a list of dozens of settlement outposts the Defense Ministry has ordered dismantled. The ministry dismantled 11 outposts on June 30.