By Tom Perry
BEIRUT, May 28 (Reuters) - Palestinian leaders tried on Monday to negotiate an end to a bloody standoff between the Lebanese army and Islamist militants who have been holed up in a refugee camp for more than a week.
Lebanese Prime Minister Fouad Siniora said his country would not waver over its demand that the militants surrender and face justice. But the Fatah al-Islam group said it would not hand over its fighters.
Worried violence could spill over to other Palestinian camps, the government is giving Palestinian factions time to try and strike a deal with Fatah al-Islam, which has been battling the army round the Nahr al-Bared camp since May 20.
"The Lebanese government and army are doing their utmost to deal with the threat decisively yet cautiously," Siniora said in a statement after meeting the ambassadors of Western powers.
"The alternative would be very dangerous, sending a message to outlaws and terrorists around the world that Lebanon would be easy and fertile ground for their operations. Lebanon rejects ... terrorism and will not tolerate it under any circumstances."
Abu Emad al-Refaie, Lebanon representative of the Palestinian Islamic Jihad group, said Palestinian factions had yet to agree on how to "end the phenomenon of Fatah al-Islam peacefully".
"The military solution is no longer an option," said Refaie.
CAUTION
Analysts said the government was proceeding with caution as it feared any storming of the camp could trigger violence at one or more of the other 11 refugee camps in the country.
The army is banned from entering the camps, home to some 400,000 Palestinians, under a 1969 Arab deal.
"What is slowing down the army is the realisation that we could have a nationwide problem," said Timur Goksel, an expert on security affairs in Lebanon. "This would mainly be a reaction if the Palestinian civilian suffering was heavy."
Lebanon's worst internal fighting since the 1975-1990 civil war has killed at least 78 people -- 33 soldiers, 27 militants and 18 civilians.
Sporadic gunfire occurred in the early hours of Monday. At least three explosions rocked the frontline in the afternoon.
The army said in a statement it opened fire when fired on and destroyed Fatah al-Islam fortifications, "causing definite casualties in the ranks of the militants".
The Lebanese government has demanded the handing over of Fatah al-Islam militants, many of whom are not Palestinian. It accuses the group of starting the conflict by attacking army positions round Nahr al-Bared and the northern city of Tripoli.
Fatah al-Islam says it is fighting in self-defence. "We have not discussed the matter of handing them over," Refaie said.
The Palestinian factions had agreed on other points, including the formation of a committee to shore up security in the camp, he said.
A Fatah al-Islam spokesman said the group would not hand over any of its fighters. "This is impossible," Abu Salim Taha said by telephone from inside the camp.
Fatah al-Islam was not in direct contact with the Palestinian factions but was talking to religious leaders in the camp, he said. "There is some mediation."
The Lebanese authorities say Fatah al-Islam includes Arabs from Saudi Arabia, Algeria, Tunisia, Syria and Lebanon.
Saudi Ambassador Abdul-Aziz Khojah said four Saudi militants with Fatah al-Islam had been killed in the fighting. He told the pan-Arab al-Hayat newspaper on Sunday members of the group shared the ideology of al Qaeda.
More than half Nahr al-Bared's 40,000 residents have fled, mostly to the nearby Beddawi camp, which relief workers say is now seriously overcrowded.
Members of Lebanon's anti-Syrian cabinet have described Fatah al-Islam as a tool of Syrian intelligence. Fatah al-Islam broke away from the Syrian-backed Fatah al-Intifada group last year. Damascus denies any links to Fatah al-Islam.
In a sign of increasing tension across the country, Lebanese soldiers fired at a car that tried to drive through a checkpoint on a road leading to Beirut's international airport, killing two occupants and arresting a third. (Additional reporting by Nadim Ladki, and Lutfi Abu-aoun in Nahr al-Bared)