Tel Aviv, Israel ? An attacker firing an M-16 rifle killed three people and wounded 31 in a Tel Aviv restaurant early today, hours after an Israeli raid killed the wife and three children of a Hamas militant in what Israel said was a mistake.

The gunman was shot dead during the restaurant assault, the latest in a spiral of attacks and counterattacks by both sides that have left 17 Palestinians and 25 Israelis dead in three days.

Members of the Israeli police bomb squad search the area where a Palestinian gunman opened fire in a crowded restaurant in Tel Aviv. The assault early today killed three people.

Four of the wounded had serious injuries, officials said. The three dead were Israelis. The injured weren’t immediately identified but most were believed to be Israelis.

Israel Radio reported that the Al Aqsa Martyrs Brigade, linked to Palestinian leader Yasser Arafat’s Fatah movement, claimed responsibility. Callers to TV stations said the attacker was a Palestinian from the Jebalya refugee camp next to Gaza City.

Witnesses said the gunman fired the assault rifle as he walked into the restaurant and night club in a commercial area of Tel Aviv at 2:15 a.m., also lashing out at patrons with a knife.

The shooting went on for five minutes, said a witness who gave his name as Effie. “He was firing all the time.”

Shoe salesman William Hazan, who was eating with his wife, told Israel Radio he drew his own pistol and shot the attacker.

“The tall man stabbed me in the back with a knife,” he said. “Then I understood that he was the terrorist. Right away I started firing at him.”

Police said they also shot the assailant and that it was their gunfire that killed him.

Late Monday, warplanes lashed out at Palestinian headquarters in the West Bank and Gaza, hitting empty buildings in Bethlehem and Gaza with a near-miss on Arafat himself in Ramallah, where the Palestinian leader has been confined by Israeli tanks for three months.

Missiles fired by Israeli helicopters in Ramallah hit a building a few yards from Arafat’s office, witnesses said. Arafat was in his office with aides, officials said, and was not hurt.

Meanwhile, the newest peace effort teetered when Palestinian minister Nabil Shaath said Saudi Arabia would not present its initiative to an Arab summit in Beirut later this month unless Arafat is allowed to attend.

But an Israeli official said Arafat will be confined to Ramallah until he takes steps to stop violence.

Shaath spoke after meeting Saudi Crown Prince Abdullah, who is reportedly backing a proposal to offer Israel peace with the entire Arab world in exchange for Israeli withdrawal from the West Bank, Gaza Strip and east Jerusalem.

The multiple strikes in the West Bank and the Gaza Strip followed a Cabinet decision Sunday to intensify military action after Israel was left reeling from Palestinian bombing and shooting attacks that killed 22 Israelis over the weekend.

Besides Ramallah, Israeli air strikes zeroed in on Arafat’s other headquarters. F-16 warplanes bombed buildings in Bethlehem just one mile from the Church of the Nativity, traditional birthplace of Jesus. Doctors said four people were hurt. The buildings were empty, as Palestinians evacuated offices several days ago, expecting an Israeli attack.