Jewish settlers took over four homes in Arab East Jerusalem overnight, igniting scuffles in which a leading Palestinian was injured, Israeli police said Monday.

Faisal al-Husseini, the Palestinian official responsible for Jerusalem affairs, said he was hit on the head, apparently by a stone, when he joined Palestinians and Israeli peace activists in confronting the settlers.Saeb Erekat, chief Palestinian peace negotiator, warned of the potential for "major grave consequences" if the settlers were not evicted. Peace activists and Palestinian residents said the land was owned by Arabs.

But an Israeli spokesman, David Bar-Illan, said members of the right-wing Elad group owned the homes.

"This is an absolutely legal transaction," he said.

The Jews moved into the Silwan neighborhood outside the Old City walls just as Israeli media speculated that Prime Minister Benjamin Netanyahu was close to breaking a 15-month-old peace dead-lock with Palestinians.

Supporters of Jewish settlers in Netanyahu's coalition have threatened to topple him should he go through with plans to give Palestinians self-rule in the West Bank in keeping with Israeli peace promises.

Israeli peace activists say 16 Jewish families have moved into Silwan, home to 30,000 Palestinians, over the past decade. Witnesses said Israeli soldiers on Monday forcibly removed the peace activists from the site.

The fate of East Jerusalem - captured by Israel in 1967 and annexed but regarded by Palestinians as the capital of a future state - is at the top of the agenda in Israeli-Palestinian talks due to end in a final peace by May 1999.

"We believe Jews should be able to live in Jerusalem," Netanyahu's senior adviser Danny Naveh told Israeli army radio. The settlers assert that Silwan was where the biblical King David built the first capital of the Jewish people.

"There were legal discussions for many years . . . and a few months ago the courts decided in our favor," Elad member Yehuda Amali told Israel Radio.

On Sunday, Netanyahu defended himself against criticism in his right-wing camp, calling himself the greatest champion of Jewish settlement in the occupied West Bank.

Inside Jerusalem's Old City walls on Sunday, Israel began an archaeological dig on a controversial site where right-wing Jews plan to build a new settlement.