Israeli and Palestinian Authority negotiators seemed close to a solution to the five-week impasse at the Church of the Nativity last night. The one remaining point in contention was the number of Palestinian gunmen to be deported to Italy, sources said.

Defense Minister Benjamin Ben-Eliezer declared yesterday in a meeting with Labor MKs: “We are now close to the final stage of the resolution of the Church of the Nativity affair in Bethlehem.”

In Washington, U.S. Secretary of State Colin Powell said Palestinians and Israelis were close to an agreement on the dispute in Bethlehem.

Negotiations continued in Bethlehem yesterday, with Israel hoping that the standoff at the church compound can be resolved so that Prime Minister Ariel Sharon is able to focus on other issues in his meeting with U.S. President George Bush today in Washington. Most talks about the Bethlehem issue were held yesterday by phone, with CIA and European Union officials mediating the discussions.

The main dispute involves the number of Palestinians to be sent into exile, a senior Israeli security source said yesterday. Israeli security defines 39 of the Palestinians holed up in the church as terror suspects, who either carried out attacks themselves, or assisted in strikes. Israel has divided these 39 men into two groups: 13 wanted men “with blood on their hands,” who took part in attacks or gave orders to carry them out; and 26 less sought after suspects. Included in the first group are senior Hamas operative Aziz Jubran and the head of Palestinian General Intelligence in Bethlehem Abdullah Duad.

Israel demands the expulsion of the 13 top suspects, apparently to Italy, the security source explained. As for the other 26, Israel assents to an American-European proposal whereby these suspects would be removed to the Gaza Strip. Assuming that the 39 are sent abroad and to Gaza, Israel agrees to refrain from conducting any arrests or investigations of other Palestinians who were confined in the church compound.

The Palestinians, however, reject Israel’s demand regarding overseas expulsion. Yesterday morning, PA Chairman Yasser Arafat’s office agreed to the expulsion overseas of just six of the top terror suspects; the remaining 33 men would be sent to the Gaza Strip. As international pressure mounted on Arafat during the day, the Palestinians subsequently agreed to the expulsion of seven, and then 10, terror suspects.

After the Palestinians agreed to bargain with the deportation numbers, U.S. and European officials checked with Israeli counterparts last night, hoping the Sharon government will agree to lower the number of terror suspects whose deportation it demands. Israeli security officials insisted that Israel has “full security justification” supporting the demand to send the 13 men into exile; Israeli security officials gave the Americans and Europeans intelligence information, believed to link the suspects to lethal terror strikes in Israel and the territories.

Hamas announced yesterday that it opposed the sending of its members into exile abroad.

Israeli security officials clarified yesterday that no talks are being conducted regarding the duration of the suspects’ exile abroad. Palestinians spread reports yesterday that the deported men will be abroad for three or four years, during which time they will complete academic studies. A top Israeli official said yesterday these reports represent “Palestinian wishful thinking.” Israel regards these deportations as “permanent exile, unless there is a major turnabout here in the direction of peace and with guarantees being given that the [13 men] will not resume terrorist activity,” the senior Israeli source explained.

Israeli officials yesterday speculated that Arafat might be stalling so as not to resolve the Bethlehem issue before Sharon’s meeting with Bush today. The PA leader does not want the resolution of the impasse to appear to be a “gift” to Sharon, the Israeli officials indicated.

According to Reuters, Israel learned for the first time on Saturday that several terror suspects it believed were confined in the church compound are nowhere to be found at the Bethlehem site.

The Terror Victims Association yesterday asked Attorney General Elyakim Rubinstein to delay the release of terrorists so that it can petition the High Court. The association announced yesterday that it will send a delegation abroad to lobby against the release of terrorists – the delegation will try to meet with the Pope.