Israeli troops have taken control of a prison in the West Bank town of Jericho, destroying its walls with bulldozers and killing a guard.
They are trying to seize militant Ahmed Saadat, blamed for the assassination of a minister. He refused to surrender.
A British cultural centre in Gaza has been set ablaze and an EU compound stormed, in an apparent response to events in Jericho.
Hundreds of people in Gaza have been demonstrating against the Israeli raid.
Palestinian militants from the al-Aqsa Martyrs' Brigades in Gaza City have warned US and UK nationals to leave the Palestinian territories immediately.
Reports from Jericho said Mr Saadat, of the Popular Front for the Liberation of Palestine, and several of his colleagues were refusing to come out of the prison.
Al-Jazeera TV has broadcast a telephone interview with Mr Saadat in which he says he is in his prison cell and will not surrender.
Mr Saadat is normally guarded by British and US prison warders, in addition to Palestinian jailers, but they were withdrawn on Tuesday for what they described as security reasons.
Palestinian Authority President Mahmoud Abbas has condemned the raid and said the US and UK warders were responsible for the prisoners' safety.
He said the withdrawal of the British and US guards who normally observe the prison was a grave violation of agreements with the Palestinians.
British Foreign Secretary Jack Straw said the PA had ignored repeated British requests for guarantees regarding the security of the prison gaurds.
Threat
Israeli troops are reported to have threatened to kill the prisoners if they do not surrender
Reports from the scene said 50 jeeps and three tanks pushed into the oasis town in the Jordan valley, as two helicopters hovered overhead.
The army later brought a large armoured bulldozer to the prison, which proceeded to demolish walls.
One prison policeman is reported to have been was killed by gunfire and there are reports of 18 Palestinians wounded.
Mr Saadat was arrested in connection with the killing of right-wing Tourism Minister Rehavam Zeevi by PFLP gunmen in 2001, an attack which itself was to avenge the assassination of Mr Saadat's predecessor by Israel.
Mr Saadat has been in Palestinian custody since early in 2002 - being moved to Jericho under international supervision in a deal to lift Israel's siege of Yasser Arafat's Muqataa compound in May of that year.
The following month the Palestinian High Court ordered his release, saying there was no evidence to link him to the Zeevi assassination.
Israeli officials said Mr Saadat would be killed if he was freed, and the Palestinian cabinet blocked the release.
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