The agreement clears the way for the formation of a government in the coming days and the resumption of high-level talks with Israel, but frustrates American efforts to sideline Arafat.
Also Saturday, Israeli troops shot and killed two Palestinians in violent street clashes and blew up a large explosives lab hidden among buildings in a cramped West Bank refugee camp. In Gaza, soldiers killed two Palestinians in an off-limits zone near the fence with Israel.
Arafat and Prime Minister Ahmed Qureia met Saturday with top officials from the ruling Fatah movement to finalize agreement over control of eight security branches and the makeup of a new Cabinet. With the arrangement, an intense power struggle and weeks of political limbo appeared close to an end.
"I hope we will finish forming (the Cabinet) in the next couple of days," Arafat said. "We will announce it as soon as possible."
Arafat came out the clear winner, maintaining his ultimate hold on security forces by placing them under the command of a 12-member national security council that he chairs. Qureia earlier demanded that those forces be put under the control of an interior minister of his choosing.
Arafat, too, rejected the prime minister's pick for interior minister and placed his own longtime confidant, Hakam Bilawi, in that position.
The two leaders will meet again Sunday to work out several final points of dispute. In a move to further tighten his ultimate hold over security, Arafat wants Bilawi's responsibilities to include overseeing public order, meaning he would direct security forces in carrying out the orders of the national security council. Qureia is seeking to limit Bilawi's authority.
Pushing Qureia hard in the deal, Arafat appears set even to reject a last face-saving consolation for his prime minister, who sought to have his rejected pick for the interior minister, Gen. Nasser Yousef, stay in the government as a deputy prime minister. Arafat is resisting.
The compromise is sure to upset U.S. officials, who, along with Israel, have sought to isolate Arafat and whittle away at his authority. The previous prime minister, Mahmoud Abbas, walked off the job after just four months, also after failing to wrest security forces from Arafat's control.
Israel and the United States believe Arafat has links to terror attacks and is a hindrance to progress toward peace. U.S. officials had hoped a prime minister in control of security personnel might use them to crack down on Islamic and other militant groups that have killed hundreds of Israelis.
Palestinian leaders, including Qureia, have said they prefer a negotiated end to violence, not a crackdown on militants, which they warn could widen into a civil war.
With the political standoff nearing resolution, Qureia could announce the makeup of the Cabinet by Sunday, officials said.
"They worked out the major issues and the small details will be worked out in the coming hours," Arafat aide Nabil Abu Rdeneh said.
The Palestinian parliament could be called on to confirm the new Cabinet within the next three days, he said.
Fighting continued Saturday, with Israeli troops killing two Palestinians in Gaza and two in the West Bank.
On the edge of the northern Gaza Strip soldiers shot and killed two men spotted crawling toward a security fence separating the area from Israel. Troops found wire cutters, but no weapons, with the bodies.
In the West Bank town of Jenin, Palestinians hurling rocks attacked Israeli forces searching for militants planning suicide attacks. Gunmen also attacked soldiers as they neared the site of a hidden explosives lab, the army said. The army said troops shot and killed a man who hopped onto an armored vehicle and tried to steal weapons from its roof.
Witnesses, however, said the dead man, Mohammed Salah, 19, was killed while standing among the crowd of stone throwers.
Half an hour later, troops in the town's refugee camp uncovered the explosives lab. It held dozens of pounds of explosives, five large cans of explosive material often used to make car bombs and two explosives belts to be worn by suicide bombers, the military said. Intelligence warnings indicated the explosives were earmarked for use in a suicide attack on a major Israeli city in the next few days, the military said.
A fourth Palestinian was killed and three others wounded in the nearby village of Burqin when troops shot at a crowd of stone throwers, according to Palestinian sources. The army said soldiers fired only warning shots.
Arafat condemned the operation in Jenin, saying it came as Israel was touting its easing of restrictions on some Palestinians in the West Bank and Gaza.
Meanwhile, about 300 Israelis and Palestinians protested Israel's construction of a security barrier that dips deep across its frontier with the West Bank. Israel says the series of fences, walls, trenches and razor wire is meant to protect Israeli cities from suicide bombers. The Palestinians condemn it as an attempt to seize wide swaths of land they want for a future state.
Protesters near a section of the barrier under construction east of Jerusalem climbed ladders to spraypaint graffiti on tall concrete slabs near the barrier. A woman wrote, "No Walls," in black paint. One man on a wooden ladder painted a Palestinian flag and wrote "peace" in English, Hebrew and Arabic.