For the first time since violence between Israel and the Palestinians erupted 18 months ago, the bloody conflict threatened last night to spill over into the Arab world.

Less than a week after Arab leaders accepted a Saudi peace initiative in Beirut there were fears of a new war breaking out across Israelís northern border with Lebanon.

Ariel Sharon, the Israeli Prime Minister, told Syria and Hezbollah fighters in Lebanon that they were ìnot immuneî from Israeli retaliation. The warning came after two days of attacks by Hezbollah, which for the first time in two years fired rockets into Israelís northern Galilee region. Israeli fighter bombers and artillery swiftly hit back.

Shimon Peres, Israelís Foreign Minister, appealed to Kofi Annan, the UN Secretary-General, to intervene to prevent a widening war. In a letter that was hand-delivered by Israelís UN Ambassador in New York, Mr Peres said that the attacks had the potential to trigger further deterioration. ìWe have received alarming information showing that Hezbollah has massively reinforced its deployment (activists and arms) in close proximity to the Blue Line in a fashion that clearly indicates preparations are being made for further attacks against Israel,î he wrote. Mr Peres requested Mr Annanís ìimmediate and personal intervention with the Governments of Syria and Lebanon with the aim of emphasising to them the gravity of the situation and the alarming consequences it could have on the stability of the regionî.

The Blue Line was drawn after Israel pulled out of south Lebanon in 2000, ending an 18-year occupation. Lebanon, backed by Syria, considers the Chebaa Farms area, which Israel still occupies, its own. Hezbollah has vowed to liberate it.

Mr Annan told the Security Council on Monday about ìworryingî attacks from the Lebanese side of the Blue Line. There was a clear threat to regional peace and security, the Secretary-General said.

Action from Hezbollah appears to be what many in the Arab world want. From Morocco to the Gulf, tens of thousands marched in protest at their leadersí failure to act against Israel. Two of the largest demonstrations were in Amman and Cairo, the capitals of the two Arab states that have made peace with Israel. They will be under pressure at an emergency meeting of Arab League foreign ministers today to tear up their peace agreements, or at least break off diplomatic relations.

Iraq said that it had drawn up its own response to the crisis and will present a plan to impose an Arab-wide boycott on oil sales to America for as long as Washington supports Israel. The resolution also calls for the Palestinians to be supplied with weapons and finance and for Arab volunteers to be allowed to enter Palestinian territory from neighbouring Arab countries. The proposal is unlikely to be accepted.

Yesterday, after Mr Sharon threatened to expel Yassir Arafat, and send the Palestinian leader on a ìone-way ticketî out of Ramallah, the Bush Administration did intervene. Washingtonís primary focus has been to seek to pressure Mr Arafat to curb the wave of suicide bombings, but Mr Sharonís suggestion that the Palestinian leader be exiled prompted alarm in the State Department and a protective arm from Colin Powell, the Secretary of State.

He said that Mr Arafat ìstill has a role to playî, adding that sending him into exile would hinder peace hopes. ìHe is in Ramallah. He is seen as the leader of the Palestinian people. Whether that is attractive to others or not, that is the role he has,î General Powell said.

But the State Departmentís signals were decidedly mixed. Hours later in Washington it announced that dependants of US diplomats serving at the Consulate General in Jerusalem could come home if they wished ìas a result of the increase in terrorist attacks and escalation in violenceî. It also urged other Americans to leave the area.

Confined to his West Bank office in Ramallah since last Friday, Mr Arafat, speaking on the Arabic satellite channel al-Jazeera, again said that he would not surrender to the Israelis. The Palestinian Planning Minister, Nabil Shaath, said in Cairo: ìArafat will stand there and live or get killed and be a martyr.î