The current security chief, Mohammed Dahlan, is supported by Palestinian Prime Minister Mahmoud Abbas, whom Arafat repeatedly tried to undermine since appointing him in April under U.S. pressure.
International mediators want Arafat to relinquish control of the security forces and allow Abbas and Dahlan to clamp down on militants in response to a Hamas bus bombing that killed 21 people in Jerusalem last week. Arafat continues to command several of the security branches, while Abbas and Dahlan supervise the rest.
Instead of giving up control over armed men, Arafat proposed Saturday to pass the supreme command to Nasser Yousef, a staunch Arafat loyalist. Such an appointment would effectively sideline Dahlan.
On Sunday, Marwan Barghouti, a prominent Palestinian leader, declined to present a closing argument in his terrorism trial on 26 counts of alleged murder.
A judge agreed to allow Barghouti to return on Sept. 29 to give a statement. The Palestinian legislator refuses to conduct a formal defense because he does not recognize the Israeli court's right to try him.
Also Sunday, Palestinian militants fired a new, longer-range rocket into Israel, the army said. The rocket, which landed about four miles from the Israeli city of Ashkelon, fell on a beach just 30 feet from an unmanned lifeguard post, the army said.
The militants fired the rocket from an area of the Gaza Strip that let them target Ashkelon rather than the much smaller Israeli town of Sderot, which had previously been the target of Qassam rockets, the army said.
The rocket was fired just hours after Dahlan's forces began arresting arms smugglers in the Gaza Strip, seizing weapons and detaining at least a dozen suspects Saturday. Dahlan's forces also sealed off two tunnels used to smuggle weapons from Egypt to the Gaza Strip.
If Yousef is appointed interior minister, Dahlan will become irrelevant, a Palestinian official said on condition of anonymity. The official said Arafat would retain effective control over the security forces if that happened, something the Americans and the Israelis oppose.
The official said he doubted the initiative would be approved by the central committee of the ruling Fatah faction. A meeting of the committee scheduled for later Sunday was canceled for reasons that remained unclear.
A main Palestinian obligation, according to a U.S.-backed peace initiative, is to dismantle militant groups.
Yousef, who is one of the oldest members of the Palestine Liberation Organization, was part of a senior guard that spent the 1980s in exile with Arafat in Tunis and Lebanon. In 1994, when the Palestinian Authority was established, Yousef was a senior police commander.
Palestinian Information Minister Nabil Amr denied Israeli media reports that Dahlan and Abbas are threatening to resign.
"There is a small crisis now about how we will strengthen the unity of our security forces...and how the Palestinians will enforce the willingness of the authority and the rule of law," Amr told Israel's Army Radio.
"We want to unify our security forces under one title, under one address," Amr said.
According to officials who attended Saturday's meeting, Abbas was initially vehemently opposed to Yousef's appointment but later expressed flexibility on the issue.
If approved by the Fatah central committee, the nomination would move to the Palestinian Legislative Council, which has to approve all Cabinet postings.
Israel retaliated for the Hamas bombing with a helicopter missile strike that killed Ismail Abu Shanab, a Hamas leader.
After Abu Shanab's killing, a cease-fire declared by militant groups on June 29 collapsed. Abbas — also known as Abu Mazen — came under even greater pressure to rein in militants, something he is reluctant to do for fear it will spark internal fighting.
Without Arafat's cooperation, a clampdown would be even more difficult, Amr said, noting that Secretary of State Colin Powell made a similar statement after the bus bombing.
In a rare call on Arafat — whom the United States has ignored for months — Powell called on the Palestinian leader last week to hand over control of his security forces to Dahlan so he would be able to effectively fight terrorism.
"We will never achieve any progress, especially in organizing our security forces ... We need Yasser Arafat, we need his cooperation," Amr said.
In the West Bank city of Nablus, Israeli forces discovered and blew up an explosives lab where they found a 176-pound bomb, fertilizers and other bomb-making materials, the army and Palestinian witnesses said.
Two rockets — similar to the Qassam rockets fired from the Gaza Strip — were found in the explosives factory, the army and witnesses said. It is unusual for the army to find rockets in the West Bank, which is much closer to Israeli cities than the Gaza Strip.