Arafat spoke one day after Israeli leaders announced they had decided to "remove" Arafat whenever they choose. The vague wording left room for several options: deporting Arafat, capturing him or killing him.
"To Jerusalem we are going as martyrs in the millions," Arafat told the crowd.
He also recited a passage from the Quran.
The crowd of hundreds held photos of Arafat and chanted: "With our blood and souls we will redeem you."
Arafat answered: "With our blood and souls, we will redeem you Palestine."
The Israeli decision prompted widespread international condemnation, and the Palestinians urged the U.N. Security Council on Friday to demand that Israel not expel him and halt any threats to his safety.
On Thursday night, Arafat emerged at the same spot and declared before thousands of supporters that no one will "kick me out."
Over strong U.S. objections, Israel insisted Friday it will remove Palestinian leader Yasser Arafat as an obstacle to peace, and one Cabinet minister said Israel "doesn't take orders" from Washington.
Israeli leaders, however, left their statements intentionally vague and put off immediate action to avoid a direct clash with the United States, leave their options open and keep the Palestinian chief wary and guessing.
However, CBS News Correspondent Robert Berger reports a major terrorist attack could be the straw that breaks the camel's back.
The 74-year-old Palestinian leader was defiant, declaring that no one will "kick me out," after thousands of Palestinians poured into streets throughout the West Bank and Gaza to support him. The Israeli threats only seemed to bolster Arafat, who has been trapped in his office for a year and a half by Israel.
Reacting to two Palestinian suicide bombings that killed 15 Israelis this week in a Jerusalem cafe and outside an army base near Tel Aviv, Israel's security Cabinet on Thursday declared Arafat "a complete obstacle" to peace, blaming him for the violence. It added, "Israel will work to remove this obstacle in the manner, at the time, and in the ways that will be decided on separately."
That wording makes room for several options: deporting Arafat, capturing him or killing him. The Haaretz daily, however, reported that when Defense Minister Shaul Mofaz talked of killing Arafat during the Cabinet meeting, Israeli Prime Minister Ariel Sharon asked him not to use that language.
However, "anyone who espouses and supports a strategy of terror should start worrying about his personal fate," said government spokesman Ra'anan Gissin.
Meanwhile, the Palestinian prime minister-designate, Ahmed Qureia, said he will begin talks this weekend on forming a full-sized government, after his proposal to take charge immediately with an emergency Cabinet of just six ministers was blocked by the ruling Fatah party.
The cumbersome task of forming a larger Cabinet of about 20 ministers will require days, if not weeks, and prolong a situation of uncertainty in the Palestinian leadership at a time of renewed Israeli threats to take action against Arafat.
Qureia said expelling Arafat would "eliminate any possibility for me to form a Palestinian government."
"We call upon all wise people in the world to stop this crazy decision," he said.
Palestinian legislator Hanan Ashrawi blamed personal rivalries for the delay in forming a government, saying it appeared Fatah and PLO leaders opposed the crisis government mainly because they feared it would not give them enough time to lobby for Cabinet jobs. "A crisis Cabinet should have been formed immediately," she said.
Ashrawi said Qureia is showing signs of weakness. "He came out strong, decisive, with a vision, and certain decisions, and then a day later, the political machinery started working and undermined him," she said.
Speaking to reporters before a meeting with U.S. Ambassador Daniel Kurtzer — and with Kurtzer at his side — Mofaz insisted Israel would act against Arafat, who he said has sabotaged peace efforts.
"I am convinced the state of Israel has in the past made a historic mistake by not taking this decision earlier," Mofaz said.
Kurtzer said that the United States had not changed its position and the issue would continue to be discussed "quietly" with Israel.
Israel believes Arafat is at least indirectly to blame for militant attacks over the last three years of fighting and charges that he's done nothing with the security forces under his control to stop bomb attacks on Israelis.
Education Minister Limor Livnat said that despite the U.S. objections, Arafat — whom she compared to Saddam Hussein and Osama bin Laden — was no longer immune.
"Israel is an independent and sovereign state and though it has a close and friendly important relationship with America, it doesn't take orders from America," Livnat said Friday.
A poll published in a newspaper Friday, showed 60 percent of Israelis would like to see Arafat killed or exiled.
Qureia said he would begin consultations on a new government Sunday, and would try to present a government to parliament for approval as soon as possible.
The immediate effect of the Israeli decision was an outpouring of Palestinian support for the embattled leader and Palestinian officials warned that an expulsion would wreck all chances for peace.
In Ramallah, Arafat appeared at the doorway of his sandbagged office building at his headquarters complex that was all but destroyed by Israeli tank fire and bulldozers during the last year.
Carried aloft by bodyguards, Arafat grinned broadly and flashed "V for victory" signs with his fingers at thousands of backers who rushed to the headquarters to protect him from what they feared would be an immediate Israeli move to seize him.
"We will die and you will live, old man," the crowd chanted.
Using a bullhorn, Arafat recited a passage from the Quran, the Muslim holy book, about being steadfast in the face of an oppressor. He also said: "My brothers, my loved ones, this round (of fighting) that the brave peoples are living through tells the world that this people is not afraid and will not kneel."
The Israeli decision meant that Sharon and Mofaz could decide on expelling Arafat without reconvening the Cabinet. Security officials said the army has already begun preparations for Arafat's quick ouster.
A 37-year-old woman injured in the Jerusalem bus bombing in mid-August near the Western Wall religious site died Friday of her wounds, raising the death toll from the attack to 23.
Arafat has been expelled twice before in his decades-long career as a militant: once in 1970 when Jordan's King Hussein tired of PLO attacks into Israel from Jordanian territory, and again in 1982 when Israel forced his organization to depart Lebanon for more than a decade of exile in Tunisia.