Palestinian leaders in Gaza agreed a ceasefire with Israel on Monday to end a deadly two-day escalation in violence that threatened to widen into war, officials with knowledge of the deal said.

An Israeli military spokeswoman declined to comment on the deal, but there appeared to have been no rocket fire or Israeli strikes after it was due to take effect, an AFP correspondent in Gaza said.

Israel reduced the offshore fishing limit it imposes for vessels operating out of Gaza from Tuesday following rocket fire from the territory by Palestinian militants, officials said.

The new Palestinian prime minister on Tuesday accused the United States of declaring "financial war" on his people and said an American peace plan purported to be in the works will be "born dead."

In his first interview with international media since taking office over the weekend, Mohammad Shtayyeh laid out plans to get through the financial crisis he has inherited and predicted that the international community, including U.S. allies in the Arab world, would join the Palestinians in rejecting President Donald Trump's expected peace plan.

Israeli Prime Minister Benjamin Netanyahu has pledged to annex settlements in the occupied West Bank if he wins the upcoming general election.

Israel reopened its crossings with the blockaded Gaza Strip on Sunday after having kept them closed for nearly a week following a rare long-distance rocket strike from the Palestinian enclave, an official said.

Prime Minister Benjamin Netanyahu said Tuesday he was prepared for further military action in Gaza after cutting short a Washington visit and returning to Israel following a shaky ceasefire announced by Hamas.

Israeli forces on Tuesday shot dead a Palestinian suspected of killing an Israeli rabbi and a soldier in the occupied West Bank, the Shin Bet internal security service said.

Two Palestinians were killed by Israeli forces in clashes near a flashpoint religious site in the occupied West Bank overnight Wednesday, the Palestinian health ministry said.

The US downgrade of its diplomatic mission to the Palestinians takes effect on Monday as it merges its Jerusalem consulate with the embassy to Israel, the State Department said.

"On March 4, 2019, US consulate general Jerusalem will merge into US embassy Jerusalem to form a single diplomatic mission," it said in a statement.

The United States has denied accusations it is pressuring banks to stop dealing with the Palestinian government, whose relations with Washington have been plummeting.