JERUSALEM, Feb. 12 (JTA) — All-out war — or a return to peacemaking. Both of those options seemed closer this week as Israel and the Palestinians intensified their 16-month armed struggle, while would-be negotiators intensified efforts to resurrect peace talks. The latest escalation in the intifada was the use by Hamas, for the first time, of ground-to-ground missiles. Two homemade Kassam-2 rockets, packing some nine pounds of high-explosive material, landed in Negev farmland Sunday. Those launches caused no damage, but the missiles´ range is enough to wreak havoc if launched from the West Bank at Israel´s heavily populated coastal strip. Israel last week intercepted a shipment of missiles on its way to Jenin, a city on the West Bank border with Israel. On Tuesday, Israeli officials were investigating what they believe was an abortive missile launch from the area of Nablus, also in the West Bank. The missiles seemed a clear Palestinian challenge to Prime Minister Ariel Sharon, given his repeated warnings that firing missiles would provoke an Israeli reaction entirely different from anything yet undertaken. Israeli Defense Minister Benjamin Ben-Eliezer spoke Tuesday of the possibility of reoccupying a large swathe of land along the Green Line to push launchers back to where missiles couldn´t threaten Israeli cities. Israel reportedly has warned the United States of this possibility. For its part, the Palestinian Authority did not try to curb the escalation, but instead released dozens of suspected terrorists from jail, arguing that they were in danger from Israeli bombs. Others were freed by mobs while P.A. police looked on impassively. Some Israeli analysts argue that Palestinian Authority President Yasser Arafat, far from seeking a cease- fire, wants to provoke a disproportionate Israeli reaction that will widen the conflict to the rest of the Middle East and force international intervention. Despite the situation on the ground — or perhaps because of it — two new diplomatic initiatives to bring the sides back to peace talks were put on the table this week. The European Union is pushing a peace package involving immediate recognition of a Palestinian state and elections in the West Bank and Gaza Strip. At the same time, Israeli Foreign Minister Shimon Peres is promoting a plan that he drafted with Ahmed Karia, speaker of the Palestinian Parliament, calling for the recognition of a Palestinian state immediately after a cease-fire has been stabilized, and before other issues are negotiated. The proposal, pushed most energetically by France, was discussed by the 15 E.U. foreign ministers in Spain last weekend. It reflects the European position that Israeli and American insistence on a full cease-fire before political talks resume prevents meaningful progress. The E.U. proposal — and the worldview behind it — sets up a possible confrontation between Europe and America on Mideast policy. The Bush administration has taken a particularly tough line with Arafat since a series of deadly terrorist attacks in early December ruined an American peace mission undertaken largely in response to Arab pressure. Arafat´s standing was further weakened by evidence of P.A. involvement in an attempt to smuggle 50 tons of weapons from Iran to Gaza — which Arafat then denied in a letter to President Bush. Europe, on the other hand, has been much more critical of Israel, arguing that Arafat can´t really be expected to crack down on terror when he is under Israeli siege in Ramallah. The Europeans say Israel and a new Palestinian state should immediately exchange recognitions, to be followed by international recognition of Palestine and the holding of elections there. Arafat likely would win a strong vote of confidence in the elections, enabling him to get tough with Palestinian terrorist groups, or so the theory goes. A renewed mandate also would undercut Israeli attempts to bypass Arafat and develop a more moderate Palestinian leadership. Negotiations then would take place on outstanding issues, including the borders of the two states. Both Britain and Germany have signaled reservations on the plan. Their respective foreign ministers, Jack Straw and Joschka Fischer, were due in the Middle East late in the week and were to meet with Sharon and Arafat. Straw told his colleagues in Spain that Israel needs stronger security guarantees, as it is being attacked by terrorists daily. But even the British and Germans are said to be uncomfortable with what Europe sees as the blanket support the Bush administration is giving Israel, and the lack of diplomatic effort — as the Europeans see it — to break the deadlock. Israel dismisses the E.U. plan as "divorced from the reality on the ground," in the words of one highly placed source. Israel of course welcomes the strong U.S. backing, but Sharon´s aides concede that Bush and his team did not endorse Sharon´s assertion, during his visit to Washington last week, that Arafat is the "obstacle to peace" and needs to be replaced. Though exasperated with Arafat, the White House does not favor his removal at this time. Israeli analysts say Bush´s primary concern is to keep the Israeli-Palestinian confrontation relatively controlled while Washington prepares a possible strike against Iraq. Meanwhile, Peres is circulating to Cabinet ministers a four-point plan that he and Karia developed, presumably with Arafat´s blessing. The program provides for: • A full cease-fire and implementation of the Mitchell Commission recommendations, which include a freeze on Israeli settlement construction in the West Bank and Gaza Strip; • Mutual recognition between independent states. The recognition would be based on U.N. Resolutions 242 and 338, which call on Israel to withdraw from "territories" — the Arabs would like to interpret this as "all the territories" — it conquered in the 1967 Six-Day War; • Final peace negotiations to be concluded within 12 months; and • International peacekeeping forces and aid machinery to bolster the agreement. Peres is canvassing support from Shas, the opposition Shinui Party and even the right-wing National Union-Israel, Our Home bloc. However, political observers say he is unlikely to win much backing, especially since his own Labor Party is split over the wisdom and practicality of the proposals. Even Labor Party head Ben-Eliezer dismissed the plan as unrealistic and impractical, as did Sharon. Some Laborites contended midweek that the Palestinians are demanding a side proposal guaranteeing a complete Israeli withdrawal from the entire West Bank, Gaza Strip and eastern Jerusalem, setting the borders of the future Palestinian state. While many Labor politicians would not object to those borders, it is foolhardy to concede them before negotiations even begin, some warned.