JERUSALEM — JERUSALEM - Israeli Prime Minister Ariel Sharon declared an end to the first phase of his army's war on Palestinian terror yesterday and withdrew most of his troops from West Bank cities they had occupied for the past three weeks. But soldiers remained poised outside Palestinian leader Yasser Arafat's compound in Ramallah and the Church of the Nativity in Bethlehem, where suspected militants are holed up. Sharon has vowed to continue the sieges until the wanted men surrender. The army pullback meant tens of thousands of Palestinians could leave their homes and begin to rebuild their lives and cities. They had been under a 24-hour curfew for three weeks, allowed outside for a few hours every three or four days. "We have finished this stage of the operation called Defensive Shield," Sharon told reporters while visiting a supermarket in Jerusalem. "We have achieved very profound results, but the struggle against terrorism continues. However, this time it will work according to a different method." Aides said Sharon was referring to the creation of buffer zones between the West Bank and Israel to prevent terror attacks. Army officials said that their offensive killed more than 200 Palestinians and that 70 high-ranking militant leaders were arrested and many weapons seized. "The infrastructure of terror in the West Bank has suffered a devastating blow," said Ephraim Sneh, an Israeli Cabinet minister and a member of the Security Council. "We hope that this change in reality will enable us to bring about a credible cease-fire." Still, Israeli police are bracing for a new wave of suicide bombings and attacks by groups seeking to retaliate for the invasion. "We took away their capacity," Sneh said at a news conference yesterday, "but not their motivation." In Washington, U.S. Secretary of State Colin L. Powell said he was pleased with the withdrawal and urged both sides to begin talks to reach a settlement. He also asked that Sharon ease the cordon around Arafat's headquarters so that the Palestinian leader can more easily restore order. "It's calmed down just a little bit, but I wouldn't want to say it's over," Powell said on NBC's Meet the Press. "I think it is still pretty serious. ... Security and the political dimension have to be more closely linked than they might have been the last year." Palestinian officials said yesterday that they do not consider Israel's withdrawal complete and stressed that they cannot begin to dismantle militant groups while Arafat and the Bethlehem church are surrounded by Israeli troops. They again vowed they would not turn over four men wanted in the killing of the Israeli tourism minister and the man accused of arranging a weapons shipment seized by Israel in January. Sharon has rejected Palestinian promises to put the five on trial, and his Cabinet has debated whether to storm Arafat's compound and take the men into custody. The United States has warned Sharon that such a move could aggravate tensions. Israel's army launched Operation Defensive Shield on March 29, after the deadly suicide bombing at the Park Hotel in the coastal city of Netanya. Troops swept into nearly every major Palestinian city on the West Bank, losing at least 29 soldiers in the army's largest offensive since the Lebanon war two decades ago. Yesterday, Palestinians got their first full glimpse of the devastation left in the incursion's wake, with entire sections of cities nearly destroyed, buildings pockmarked by bullets, government offices ransacked, and water and sewer lines severed. In Nablus, the Israeli army crushed the ancient covered marketplace, or casbah, where fruit, vegetables and spices were sold from stalls. At least 70 Palestinians were killed in that city. Municipal leaders said yesterday that several mosques were damaged, along with a 400-year-old Catholic church. Sixty houses built in the 1500s also were bulldozed, officials said, along with a centuries-old Turkish bath. In Ramallah, the provincial capital of the West Bank, residents and merchants were shocked when they returned to gouged streets yesterday. Anwar Kurdi, 36, had recently repaired the corner of his flower shop, knocked out by a tank last month, and was now trying to repair it again. "It is unbelievable what the army was doing here," he said. "We will remain in this place, this country, even if they destroy everything. No Palestinian is happy to be on the street without a curfew when there is a curfew on Arafat." Kurdi said that "from the Israeli point of view, they have succeeded. It does not mean that resistance is over. Every person who was neutral is now considering being involved. This is our land. It is better to die then to live without dignity." But even as Palestinians start to clean up, attention focuses on the remaining trouble spots: Arafat's compound and the Church of the Nativity. Negotiations again failed to resolve the standoff yesterday at the church, where at least 120 gunmen shot their way inside more than two weeks ago and have been holed up with 40 priests and monks. Five young men left the church yesterday and were taken into custody. Israeli officials have repeatedly said they would not storm one of Christianity's holiest shrines. Reports from inside the church indicate that food has run out. Sharon has offered the gunmen a choice: Surrender and face trial in Israel, or leave Israel and never return. Arafat has rejected that offer. The Vatican and the CIA are trying to help negotiate a peaceful resolution. On another front, Israel again spent much of yesterday defending its invasion of the Jenin refugee camp, where army bulldozers plowed over dozens of homes in the camp's center, burying people under tons of rubble and leaving an estimated 5,000 Palestinians homeless. The commissioner general of the United Nations Relief and Works Agency for Palestinian Refugees accused the army yesterday of using "disproportionate force" during its battles. Army officials have said that they did nothing wrong and that what Palestinians are calling a massacre was actually intense urban warfare that raged eight days. Israel has agreed to let a U.N. team investigate. The Palestinians said hundreds died in the camp, but Israel said its troops killed dozens, most of them militants. Powell called the situation in the Jenin camp "very troubling" yesterday and promised an aid package that will include 800 tents for homeless families, water purification equipment and disease-prevention kits. Many people have returned to the camp and are digging with bare hands through four-story piles of rubble, searching for their belongings and family. Several youngsters have been injured by explosive devices planted by Palestinian fighters. International aid workers combed the camp yesterday, searching for bodies and deactivating mines.