Israeli officials prepared a plan on Wednesday to cut power supplies to the Gaza Strip amid rising violence that killed two Palestinian boys after a rocket salvo damaged an apartment building in the Jewish state.

We plan to dramatically reduce the two-thirds of power that is supplied by Israel, which will take several weeks," Israeli Deputy Defence Minister Matan Vilnai told Army Radio.

Prime Minister Ehud Olmert's security cabinet declared Gaza an "enemy entity" in September, three months after Hamas Islamists routed the rival Fatah faction and seized the coastal enclave, whose borders are controlled by Israel.

The "enemy" designation was a green light for sanctions, although Israeli officials said legal experts would first be consulted on the humanitarian effects on Gaza\\\'s 1.5 million people. The United Nations has told Israel it must not inflict collective punishment by cutting vital supplies and services

The Western-backed administration of Palestinian President Mahmoud Abbas condemned Israel's plan to impose sanctions.

"This decision is a form of collective punishment against our people in Gaza," Palestinian cabinet secretary Saadi al-Kronz said in a statement.

Palestinian leaders argue that, despite Israel's withdrawal of troops from Gaza in 2005, it remains an occupying power because it controls the frontiers and, as such, is obliged under international law to ensure the welfare of the population.

Israeli officials said a Defence Ministry panel met to finalise a proposal for cutting utilities to Gaza after Palestinian militants fired at least 16 rockets on Tuesday, one of which hit an apartment building in Israel. The plan was to be presented to Defence Minister Ehud Barak on Thursday.

"The recommendation is to start disconnecting gradually, without causing harm to anything that could create a humanitarian problem, like hospitals," Vilnai said.

According to Israeli and Palestinian officials, Gaza's population uses about 200 megawatts of electricity, of which 120 are provided directly from Israeli power stations, 17 are delivered from Egypt, and 65 are locally produced in Gaza.

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Defence Ministry source said Barak was authorised to implement the sanctions, but he might seek another vote in the security cabinet and thus share responsibility with Olmert. The two men lead different parties within the ruling coalition.

Hamas has refrained from firing rockets since it seized the Gaza Strip in June but has not stopped others from doing so.

"International law requires that occupation forces take care of the needs of the occupied peoples," Hamas official Sami Abu Zuhri told Reuters.

On Wednesday Israeli troops killed two Gaza boys in an area used by militants to fire rockets into Israel, Gaza hospital officials said. An Israeli army spokeswoman said the soldiers had fired at militants who had just launched three rockets.

Hamas has described militant rocket attacks as responses to Israeli military operations in Gaza and the occupied West Bank.

The makeshift Palestinian rockets which are rarely deadly but cause damage in Israel's southern border towns. Israel has threatened to invade Gaza should the salvoes continue. (Additional reporting by Nidal al-Mughrabi in Gaza, Mohammed Assadi in Ramallah and Ori Lewis in Jerusalem)