A British contractor who was kidnapped at gunpoint by a gang of masked men in Palestine was released by his captors unharmed today, the Foreign Office said.

The Briton, and a second man from Austria, were held “against their will” after they were snatched from their car in the Al Bureij refugee camp this morning.

But the Foreign Office confirmed later that the hostages, who were both working as private contractors on a water dvelopment project in Gaza, had been freed. A Foreign Office spokeswoman said: “Both men have been freed, unharmed, and are being escorted back to Jerusalem by consular staff."

Security sources said the two men had been held since midnight (2100 GMT) by a family locked in a dispute with Palestinian authorities.

The kidnappings happened hours after a Palestinian suicide bomber delivered a setback to the Middle East peace process. Four Israeli women and the 18-year-old bomber were killed and 40 people injured in the explosion outside a shopping mall in the coastal town of Netanya. The attack was the first suicide bombing in Israel for nearly five months.

Israel responded by sealing off Gaza and the West Bank, barring all Palestinians from entering Israel, a routine measure after attacks. In addition, Israeli troops reoccupied the West Bank city of Tulkarem - close to the bomber's home village - early this morning in search of the bombing’s masterminds and blew up a storage shed they said they said housed an explosives laboratory. They killed a Palestinian policeman in a firefight as they forcefully re-entered the town and arrested five Islamic Jihad activists.

Prime Minister Ariel Sharon today ordered security forces to step up operations against Islamic Jihad, which has claimed responsibility for a series of attacks in recent weeks, and to "hit the leadership" of the group. The order ends Israel's recent policy of restraint - effectively, a lull in its targeted assassinations of militant leaders - imposed to help the peace process.

"We will not stop until they (Islamic Jihad) stop the terrorist murders," Mr Sharon said today.

Israel, the Palestinian Authority and most Palestinian militant groups have an interest in minimizing violence ahead of Israel’s withdrawal from the Gaza Strip and four West Bank settlements next month.

Israel handed Tulkarem to Palestinian control four months ago as part of what was to have been a gradual Israeli withdrawal from West Bank cities. Israeli Cabinet ministers said today that the process was frozen after the attack.

In addition, all the settlements in Gaza marked for evacuation were closed to all non-residents today, to prevent protesters from reaching the area ahead of the pullout, set to begin in mid-August.

Israel also demanded that Palestinian leader Mahmoud Abbas finally crush Islamic Jihad, a small militant group that has repeatedly violated the cease-fire. Up till now the Mr Abbas has been reluctant to act decisively against militants who have a strong following among Palestinians, .

Times Recommends

• Should Knox’s trial even have reached the courtroom?
• 'Was it real?' The US bailout nightmare
• Iranian opposition plays the long game