Israel's intelligence community painted a bleak picture of threats facing the Jewish state. The report – an annual assessment somewhat similar to Washington's National Intelligence Estimate, or NIE, was delivered to the Israeli cabinet on Sunday.

The report singles out Iran and Hamas as the two most pertinent threats to the Jewish State. It comes on the heels of an attack against Jewish religious students in Jerusalem last week, the worst such attack in four years.

Iran is mentioned for its pursuit of nuclear technology, a program taken very seriously by Israel and its intelligence community and the military. Specifically pertinent to this fact is Iranian President Mahmoud Ahmadinejad's repeated mantra that Israel is to be wiped off the map.

In Gaza the continued rocket fire by Hamas on border localities has turned the Gaza Strip into "the most active front" Israel is facing, a senior official quoted intelligence chiefs as telling the weekly cabinet meeting.

"The main strategic threats are from Iran through its nuclear program and the pivotal role it is playing as a leader of the radical axis in the Arab and Muslim world," the official quoted the annual report as saying.

Also worrying Israel is the Islamic republic's increasing cooperation with Syria, Lebanon's Hezbollah and Palestinian militant groups.

The Israeli intelligence report cautions that "While rocket fire from Hamas-run Gaza is the most "active front Israel is facing today," a wide-scale offensive by Israel against Hamas is quite likely to ignite the northern border with Hezbollah.

"If Israel launches a broad operation in Gaza, that could lead to violence on other fronts, most notably from Hezbollah," the official said.

In late June 2006, Israel launched a major operation in Gaza after militants tunneled out of the coastal strip and seized a soldier in a deadly raid.

Two weeks later, Hezbollah seized two soldiers in a separate deadly cross-border raid in Israel's north, leading the Jewish state to launch a massive 34-day offensive inside Lebanon.

Its stated aims were to recover the soldiers and halt rocket attacks into northern Israel. Neither was achieved.

Meanwhile, the peace talks suffered a major setback on Sunday when Israeli Prime Minister Ehud Olmert approved the expansion of the Givat Ze'ev settlement in the occupied West Bank to the fury of the Palestinians.

Saeb Erekat, chief Palestinian negotiator slammed Israeli expansion of the settlement as "provocative action," saying it was meant to endanger the peace process.

The expansion by 750 housing units in the Givat Ze'ev settlement, just north of East Jerusalem, comes less than a week after U.S. Secretary of State Condoleezza Rice visited the region to persuade Israelis and Palestinians to maintain dialogue despite the exchange of hostilities in Gaza.

Erekat condemned the announcement, stating that it is "a provocative action by Israel that demonstrates its intention of further strengthening its illegal occupation and colonization of Palestinian territory."

Erekat noted that the timing of the decision was "outrageous," coming as it was "on the eve of the trilateral meeting with the Americans, this expansion of illegal settlements on Palestinian land by Israel constitutes yet another slap in the face of the peace process."

Palestinians and Israelis are expected to meet with Lt. Gen. William Fraser this week to discuss the parties' performance of their obligations under the road map. Fraser was appointed by the United States to head the trilateral mechanism agreed between the parties at Annapolis to monitor road map implementation.

"One can only wonder about how seriously Israel is taking Lt. Gen. Fraser's mandate and this whole process," Erekat stated.