Kadima today refused to grant Ismail Haniya, the incoming Palestinian Prime Minister, immunity from assassination if Hamas returns to suicide bombings.

At the same time it announced it would cut millions of pounds in financial aid from Jewish settlements in the occupied territories.

Israel's dominant political party set out its latest tough lines on the country's security issues, as it and other parties launched their television campaigns for national elections on March 28.

Shaul Mofaz, the Defence Minister, warned today that Israel would not rule out targeted killings against the leadership of Hamas, the militant group elected to rule the Palestinian Authority.

Meanwhile, Ehud Olmert, Kadima's acting leader, refused to soften Kadima's policy of withdrawals from the West Bank, a proposal which has angered Jewish right-wingers.

Polls show that Kadima - created by Ariel Sharon to press ahead with withdrawal from Gaza and the West Bank - is slipping slightly in its lead in the run-up to the March 28 elections.

Stephen Farrell, Times Middle East Editor, said: "This is all about Kadima positioning themselves as being tough on terrorism while showing at the same time that they will be pragmatic and seek peace where they can. Ehud Olmert has not had long to establish a style, but these twin statements - one hawkish, one dovish - are becoming typical.

"It's no coincidence that these two statements were made today, when all of the parties are launching their political campaigns on television."

Mr Mofaz, noted for his hawkish views, gave an interview on Army Radio in which he identified Mr Haniya as a potential target for an Israeli killing.

"No one is immune," Mr Mofaz said, a day after an Israeli air strike on an ice cream truck killed two Islamic Jihad militants and three bystanders, including two children, in Gaza City.

Mr Mofaz said that there was no question about the efficacy of the targeted killings. "Look what happened to Hamas in the years it conducted an untrammelled suicide bombing war against us. When we started the targeted killings, the situation changed," he said.

Dozens of militants - and dozens of innocents - have died in Israeli air strikes, including Sheikh Ahmed Yassin, the Hamas founder. Since its election victory Hamas has rejected international calls to renounce its violent, anti-Israel ideology, but has maintained a moratorium on suicide bombings.

Asked if Haniya would be a target if Hamas were to resume attacks, Mr Mofaz replied: "If Hamas, a terror organisation that doesn’t recognise agreements with us and isn’t willing to renounce violence... then no one there will be immune. Not just Ismail Haniya. No one will be immune."

Mr Haniya, among the most pragmatic of Hamas senior figures, shrugged off the warning and accused Israel of trying to disrupt the formation of a Palestinian government. "The continued escalation aims to shed more Palestinian blood, confuse the situation and hamper... the formation of the Palestinian government," he told Associated Press.

Meanwhile, in a speech in Tel Aviv, Ehud Olmert said "billions" in settlement spending would be diverted from dangerous frontier zones to under-developed areas of Jerusalem, the Negev Desert and Galilee.

"It’s no secret that we won’t invest in coming years the same sums we once invested in construction and infrastructure development in areas over the Green Line," he said, referring to Israel’s frontier before the 1967 war.

This is the first time that Mr Olmert has said explicitly he would scale back funding for the settlement areas which has cost the state tens of billions of pounds.

Avi Dichter, a security adviser to Kadima, said that the party hopes to draw its final border in the West Bank within four years. Reducing Israel’s presence in the West Bank after its summer pullout from the Gaza Strip is the key plank in Kadima’s platform and - with Sharon incapacitated by a serious stroke - the party’s main appeal to voters.

Settler leaders reacted angrily saying that Israel should invest more money in the settlements, not less. "For the state of Israel to survive and exist, it has to deepen its presence and invest more in the settlements," said Noam Arnon, a spokesman for the small Jewish community in the West Bank city of Hebron.

Despite the rhetoric from Kadima, the major parties have chosen to focus on domestic issues such as the economy and crime rather than terrorism. Personal sniping suggests that the election is shaping up to be as much about candidates’ personalities as their policies. Likud strategists have dubbed Olmert "Smolmert", a play on the Hebrew word for leftist, while one Kadima advert urges voters to take note of what it calls Netanyahu’s "lying eyes".

Political analysts call it a response to a public worn out by war.

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