Israel yesterday froze the peace process with Palestinians and Prime Minister Ariel Sharon threatened retaliation for Friday night's Tel Aviv attack if the Palestinian leadership does not crack down on militant groups. At a Cabinet meeting, Israel decided to freeze gestures agreed on at a summit in Egypt on Feb. 8, where Sharon and Palestinian President Mahmoud Abbas declared a truce to end four years of bloodshed — turning control of five West Bank towns over to the Palestinians and freeing 400 more prisoners.At the beginning of the weekly Cabinet meeting, Sharon said Islamic Jihad carried out the bombing on orders from its leaders in Syria. "We know this for certain,"' he said, but held the Palestinian Authority responsible as well. "There will be no progress politically, and I repeat, no political progress, until the Palestinians carry out a determined campaign to destroy the terrorist groups and their infrastructure," Sharon said, warning that if this is not done, "Israel will have to increase its military activities that are meant to protect the citizens of Israel."