Israel has withdrawn its consent for a United Nations fact-finding mission to investigate the army offensive in the Jenin refugee camp.
Prime Minister Ariel Sharon and Defence Minister Binyamin Ben-Eliezer decided some of the members named in the team would be prejudiced against Israel, Israeli Government officials told the BBC.
"We weren't happy with the fact that there was no military presence on the team," an official said.
The UN Security Council is holding an emergency session late on Tuesday to discuss the Middle East crisis.
A senior US official said Washington wanted Israel to allow the UN team into Jenin in accordance with a US-sponsored Security Council resolution.
The developments came after a day of talks aimed at solving the siege at Bethlehem's Church of the Nativity ended without a breakthrough.
However, Palestinian negotiators said that progress had been made and more talks were planned for Wednesday.
In further violence on Tuesday, the Israeli military said soldiers shot dead three Palestinians who tried to break into the Jewish settlement of Netzarim in the Gaza Strip.
UN Secretary-General Kofi Annan named former Finnish President Martti
Ahtisaari to lead the UN inquiry at the Jenin refugee camp.
The team would also include Cornelio Sommaruga, former president of the
International Committee of the Red Cross, and Sadako Ogata, the
former UN High Commissioner for Refugees.
Palestinians say Israeli forces massacred civilians in Jenin during some of the fiercest fighting in the army's West Bank offensive aimed at destroying militant groups.
Israel has vehemently denied the claims, saying the numbers of victims are being exaggerated.
Israeli radio quoted a senior government official as saying the decision to withdraw approval for the UN team would be communicated to Secretary
General Kofi Annan "in the coming hours".
The European Union's foreign policy chief Javier Solana is due to leave for the West Bank shortly after Israel said it would allow an EU team to meet Palestinian leader Yasser Arafat in his besieged Ramallah compound.
In Bethlehem, Palestinian official Salah Taamari said that there were still "some tough points" for both sides to tackle.
He added that the Israeli army may allow four people to be evacuated from the church later on Tuesday, Reuters reported.
A BBC correspondent says the sticking point is the fate of about 30 armed Palestinians inside the church who Israel says are wanted militants.
Israel wants them sent into exile or tried in an Israeli court, while the Palestinians want them to be disarmed and allowed to go to the Gaza Strip under international escort.
An Israeli army spokesman, Lieutenant-Colonel Olivier Rafowicz, said they believed there were about 230 armed Palestinians in the Church of the Nativity, of whom 35 to 40 are considered "senior terrorists".
With them are up to 30 church officials and 50 Palestinian teenagers, plus two 10-year-old boys, he said.
Conditions inside are understood to be harsh with poor hygiene and limited food and water.
Earlier on Tuesday, masked Palestinians shot dead three suspected informers in Hebron after a local head of the militant al-Aqsa Martyrs brigade was killed in an Israeli missile strike.
Israel also imposed new travel restrictions in the Gaza Strip on Tuesday and made some minor incursions, which raised fears among Palestinians that Gaza could be the next target for an Israeli military campaign.
Copyright 2002 BBC