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GAZA CITY, Gaza Strip - Two masked gunmen shot out the tires of a diplomatic vehicle and kidnapped Egypt's military attache to the Palestinian Authority on Thursday, in a brazen daylight abduction just outside the heavily guarded Egyptian mission in Gaza City.

The kidnapping of a diplomat from one of the Palestinians' most important allies signaled that no one was immune from the increasing lawlessness in the Gaza Strip. Egypt, a frequent mediator between militants and Palestinian leader Mahmoud Abbas, is seen by some as the only chance for maintaining some stability in Gaza.

The militants ambushed Hussam Almousaly's car about 200 yards from the Egyptian mission and kidnapped him, another Egyptian diplomat said, speaking on condition of anonymity because he was not authorized to speak to the media.

The identity of the gunmen or their motive was not immediately known. Palestinian security officials set up roadblocks throughout Gaza to try to find the kidnappers.

The Egyptian Foreign Ministry said in a statement that it was working to determine how the abduction happened and to "expedite the release of the kidnapped diplomat."

Palestinian Prime Minister Ahmed Qureia identified the kidnapped man as an Egyptian military attache.

"We totally condemn such acts," Qureia said.

Sami Abu Zuhri, a spokesman for the Islamic Hamas group, which won Palestinian parliamentary elections last month, condemned the kidnapping, saying it "harmed the Palestinians strong relations with Egypt."

Gaza militants have kidnapped about 20 foreigners in recent months, using their hostages to try to get jobs from the Palestinian Authority or to force it to release their jailed comrades. The Palestinian Authority routinely accedes to their demands, and all of the previous hostages have been released unharmed.

Almousaly's kidnapping was the most serious attack against diplomats in Gaza since unidentified militants bombed a convoy of U.S. diplomats in October 2003, killing three American security guards.

The kidnapping came amid a flare-up in violence between Israel and Palestinian militants over the past week, with Palestinians launching rockets from Gaza against southern Israeli towns, and Israel retaliating with artillery fire and airstrikes. Over the past week, 14 Gaza militants have been killed in airstrikes and other violence.

Early Thursday, two militants threw hand grenades and opened fire on Israeli forces at the Erez checkpoint, where thousands of Palestinian laborers cross from Gaza into Israel every day. Israeli troops shot them dead in a gunbattle, and the bomb belt they were carrying exploded, the army said. No Israeli soldiers were wounded.

The violent groups, the Popular Resistance Committees and Al Aqsa Martyrs' Brigades claimed joint responsibility for the attack in a call to The Associated Press. Al Aqsa is a violent offshoot of Abbas' Fatah Party, which lost the parliament election.

The army closed Erez.

Hours later, just one mile from Erez, Israeli troops opened fire on two people planting an explosive device near the security fence between Gaza and Israel, killing one and wounding another.

Also Thursday, Palestinian officials said they would begin paying government employees their overdue January salaries despite a severe budget crisis. The Palestinian Authority borrowed some payroll money from banks, after several Arab countries did not transfer millions they had promised, said the deputy finance minister, Jihad al-Wazir.

About 25 armed Al Aqsa militants who joined the security forces at the end of last year briefly broke into the finance ministry building in Gaza City to demand their salaries and blocked the road leading to the government buildings in Gaza. The gunmen left after being assured they would be paid within 24 hours like everybody else.

About a dozen other Al Aqsa militants on the government payroll took over the Interior Ministry building in the

West Bank city of Hebron, demanding their salaries.

The cash-strapped Palestinian Authority needs $116 million to pay 137,000 employees every month. In the past, the government has borrowed from banks to make the payroll, in addition to relying on foreign aid and millions of dollars in monthly tax transfers from Israel.

The perpetual crisis is likely to worsen in the wake of the Hamas' election victory. Foreign donor countries threatened to cut off aid and Israel said it would halt the tax transfers once Hamas forms a government.

In Washington, acting Israeli Foreign Minister Tzipi Livni said that after Hamas forms a government, the Palestinian Authority could be designated a "terrorist state." Speaking Wednesday after meeting U.S. Secretary of State Condoleezza Rice, Livni said the international community has its "own sanctions and measures when it comes to an entity which transfers into a terror entity."