Arafat said to be overseeing standoff talks

Israeli soldiers rush by a burning building near the entrance to Bethlehem's Manger Square.

BETHLEHEM, West Bank (CNN) -- Talks to end a monthlong standoff at Bethlehem's historic Church of the Nativity continued Saturday even as violence continued outside.

Palestinian sources inside the church indicated Palestinian leader Yasser Arafat was overseeing negotiations with the Israelis. Israeli sources confirmed that negotiations were continuing, and both sides appeared ready to end the impasse.

Some 200 people -- including 25 to 30 Palestinians the Israelis say they want to bring to trial -- are holed up inside the church.

"We hope the Palestinians have the wisdom and rationality to bring this to a peaceful conclusion," said Lt. Col. Olivier Rafowicz, an Israeli army spokesman

"We are all eager to go home," said Tony Salman, a Palestinian inside the church.

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As the two sides talked, violence in Bethlehem went unabated Saturday.

Israeli military sources said IDF soldiers shot and killed a gunman who emerged from the church Saturday morning carrying a weapon. The soldiers felt they were in danger from the gunman, who was evacuated to a hospital, where he died of his wounds, the sources said. (Full Story)

In a separate incident Saturday, an explosive device detonated about 550 yards (500 meters) from Manger Square in Bethlehem, blowing out the windows of a nearby building. The Israel Army was searching the area and has sent for a bomb-disposal team to check the building.

An Israeli soldier described the bomb site as a "TNT laboratory," but official sources did not confirm that. No injuries were reported in the explosion.

Elsewhere in the Mideast conflict, Israeli army tanks and jeeps, poised at the entrance to the Khan Younis refugee camp in Gaza, shot and killed a Palestinian National Guard member and injured two others on the camp's main road, Palestinian sources said.

Khan Younis is near the Gush Khatif settlements.

Israeli military sources said Israeli soldiers came under fire from a Palestinian gunman near Gush Khatif, and returned fire, killing the gunman.

More than 200 Palestinians, including about 30 gunmen, took cover in the compound on April 2 during an Israeli offensive, part of a large-scale West Bank military operation to crush Palestinian militias who were behind terror attacks on Israelis.

-- CNN Senior International Correspondent Walter Rodgers contributed to this report.