GAZA CITY, Gaza Strip - Israeli troops demolished 13 Palestinian homes along a Gaza road today, after Palestinian gunmen ambushed Jewish settlers there during an outdoor memorial service at the spot where an Israeli family was killed last week.

No Israelis were injured in Sunday's attack, but automatic fire kept dozens of settlers, including terrified toddlers, pinned to the ground for 20 minutes. Many crouched behind cars during the battle, before racing to nearby armored buses.

Israeli soldiers killed at least one gunman, and were searching the area for the body of the second gunman. The militant Islamic Jihad group claimed responsibility for the shooting.

The Israeli military said the houses were torn down because they had served as cover for the gunmen.

Meanwhile, Palestinian vandals with axes and shovels desecrated or destroyed 32 graves in a Commonwealth military cemetery in Gaza City. Photographs of U.S. and British soldiers abusing Iraqi prisoners were stuck to some of the tombstones. "We will take revenge," was written on one tombstone.

About 3,000 Commonwealth soldiers killed in World War I, including those from Britain and India, are buried in the plot in Gaza City.

Israeli Prime Minister Ariel Sharon, meanwhile, canceled a trip to the United States, saying he intended to focus his energies on putting together a new plan for withdrawing from the Gaza Strip after his party rejected his original plan.