Omar Abu Zayed, 25, was making the bomb in his blacksmith's shop in the Doha neighborhood across from the Deheishe refugee camp when the device exploded, Palestinian security officials said.
Abu Zayed was a known member of Islamic Jihad, which has claimed responsibility for scores of attacks against Israelis.
Also Sunday, Israeli bulldozers flanked by armored personnel carriers entered the town of Beit Hanoun, north of Gaza City, and destroyed some olive and orange trees in an area where there had been exchanges of fire overnight, witnesses said.
The Israeli army said it was checking both reports.
The incidents came as U.S. Secretary of State Colin Powell planned to meet in New York with Israeli Foreign Minister Shimon Peres, who is working on a new peace initiative that reportedly calls for the establishment of a Palestinian state in the areas already under Palestinian control as a first phase.
Peres discussed the plan Saturday with Prime Minister Ariel Sharon, whose stated positions contrast with elements of the plan reported in Israeli media, namely that the Palestinians be granted more land in the Gaza Strip and West Bank as part of negotiations over final borders.
Sharon's spokesman Raanan Gissin said Sunday he was sure Peres and Powell would discuss elements of the proposal. Both men are in New York for the UN General Assembly's annual debate.
Gissin warned Palestinian leader Yasser Arafat against unilaterally declaring a Palestinian state during his UN address, scheduled for Sunday. Palestinian officials said they didn't expect any surprises from Arafat's speech.
Gissin did say Arafat was taking some steps to crack down on militants. He said Arafat had to take more significant steps, though, to prevent suicide bombers from attacking Israelis.
"Those you have to stop," he said. "If you arrest them, there won't be terror attacks."
Peres said in an interview broadcast Friday on Swedish radio that perhaps the best thing to reopen negotiations would be the declaration of a Palestinian state. He spoke after meeting Thursday with Ahmed Qureia, a top Arafat aide.
As part of the plan Peres is preparing, Jewish settlements in Gaza would be dismantled, Israeli news reports said. Sharon firmly opposes the uprooting of any of the more than 140 settlements in the Gaza Strip and West Bank. Sharon has said a Palestinian state could be established before an agreement on final borders is reached, but he is against pulling troops out of additional occupied areas.
Sharon has not made public any plans for peace talks. He has repeatedly insisted that all violence must cease before negotiations can resume.
The recent fighting between Israel and the Palestinians, begun in September 2000, has killed a total of 751 people on the Palestinian side and 196 on the Israeli side.
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