Mediators had been upbeat about bringing an end to more than a month of fighting between the army and the al Qaeda-inspired Fatah al-Islam group at the Nahr al-Bared camp in north Lebanon.
"Things have been complicated. The initiative has not succeeded," a Palestinian political source said.
"The Lebanese army is insisting on the surrender of all leaders and key members of Fatah al-Islam. It seems the Nahr al-Bared front will remain open for some time," the source said.
A Lebanese security source confirmed the army wants the surrender of Fatah al-Islam leader Shaker al-Abssi and his military commander known as Abu Hurayra. The camp siege is the worst internal conflict since the 1975-1990 civil war.
A group of Palestinian clerics has been leading efforts to end the fighting that has killed at least 164 people, including 75 soldiers, at least 59 militants and 30 civilians.
Sheikh Mohammad al-Haj, one of the mediators, said the army had yet to respond to a peace initiative presented by the clerics on Wednesday.
The army says Fatah al-Islam started the conflict on May 20 by attacking its posts. The group, which includes fighters from across the Arab world, says it has been acting in self-defence.
Lebanese Defence Minister Elias al-Murr said some of the fighters arrested were members of al Qaeda. "There is a section of them which belongs directly to al Qaeda," Murr said in an interview published in An-Nahar newspaper.
Fatah al-Islam has said it has no organisational ties to al Qaeda but shares its militant ideology.
The army shelled the camp heavily on Thursday and fought the militants around the southern end of the camp, witnesses said.
Most of the camp's 40,000 residents fled during the early days of the fighting, which has destroyed much of the sprawling maze of alleyways on the Mediterranean seafront.
The army tried to seize areas held by the militants on the outskirts of the camp. Security forces are barred from entering Lebanon's 12 Palestinian refugee camps by a 1969 agreement.
Neighbouring Syria on Wednesday closed one of its border crossings into northern Lebanon.
Syria has closed three crossings into north Lebanon, citing security concerns since the start of the Nahr al-Bared fighting. Anti-Syrian Lebanese leaders say Fatah al-Islam is a tool of Syrian intelligence. Both Syria and the group deny any links.
- Reuters - Thomson Reuters Foundation
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