However, the new government may have trouble renewing talks with Israel, reports CBS News Correspondent Robert Berger. One Israeli official commented the new cabinet shows that Arafat's terror cartel remains firmly in power.
The new lineup leaves Arafat in control of Palestinian security forces, despite Israeli and U.S. demands that he step aside. Israel stopped short of saying it would not deal with Palestinian Prime Minister Ahmed Qureia.
"I hope [Israel] will now put all its efforts to end the occupation, to get us back to the peace process," said Palestinian Foreign Minister Nabil Shaath.
Arafat's national security adviser, Jibril Rajoub, attacked the Bush administration, saying it is controlled by Zionist groups and biased in favor of Israel. "The word `Arab' causes them (U.S. officials) nausea and revulsion," Rajoub said in a recent interview with the London-based daily Al Haqaeq.
While privately complaining of U.S. bias, Palestinian Authority officials are usually careful not to go too far in their public criticism of the United States, the key Mideast mediator. Rajoub has had close ties to U.S. officials in the past.
A senior Israeli lawmaker is criticizing Egypt, the first Arab country to sign a peace treaty with Israel, saying it supports Palestinian militants by turning a blind eye to arms smuggling from its territory into the Gaza Strip.
Yuval Steinitz, the head of parliament's Defense and Foreign Affairs Committee, said Hamas militants in the Gaza Strip get most of their explosives and other weapons through tunnels on the Egypt-Gaza border.
Egypt does little to prevent the arms smuggling and has only briefly cracked down following intense U.S. pressure, Steinitz said.
Egyptian President Hosni Mubarak has denied the tunnels are used for smuggling weapons, and has suggested Israel seal the tunnels on the Palestinian side.
"They (the Egyptians) are not giving the smugglers weapons, but they are turning a blind eye," Steinitz told diplomats and reporters. "This is a kind of implicit tacit support of terrorism."
Also Monday, the Israeli daily Haaretz said the Defense Ministry wants to extend a planned security barrier six miles east of Jerusalem, reaching far deeper into the West Bank than in published ministry plans. Ministry officials said the published route, which runs closer to Jerusalem, reflects official thinking.
Israel says it is building the barrier through the West Bank and around Jerusalem to keep out Palestinian militants. Palestinians fear an Israeli land grab. The barrier has emerged as a major point of contention between the United States and Israel, with U.S. officials demanding it not cut into the West Bank.
Israel's Cabinet Sunday narrowly approved a prisoner swap with Hezbollah after eight hours of anguished debate, but the deal could still collapse over a Lebanese inmate who was responsible for the deaths of three Israeli civilians in 1979.
Hezbollah leader Sheik Hassan Nasrallah reiterated Monday that the prisoner, whom Israel refuses to release, has to be part of the deal. However, Nasrallah did not slam the door, saying he still waits to hear from a German mediator.
The 12-11 vote Sunday reflected widespread concern that the lopsided deal — hundreds of prisoners in exchange for an Israeli businessman and bodies of three soldiers — would signal weakness and encourage more kidnapping of Israelis.
Critics of the deal also believe it's a reward for terrorism, reports Berger.
In order to move ahead, Qureia had to back down in a weeks-long dispute with Arafat over control of the security forces. Qureia's defeat left him weakened and threatened to complicate efforts to begin implementing the U.S.-backed "road map" peace plan.
He plans to present the new cabinet to parliament on Wednesday.
Despite their misgivings, Israeli officials — who face public pressure to resume some sort of peace talks — stopped short of saying they would boycott Qureia because Arafat remains in control.
"This is a sad day for reform, because we see that the control of the security services remains in the hands of Arafat's cartel of terror," said Raanan Gissin, an adviser to Israeli Prime Minister Ariel Sharon.
The United States was also critical. "The prime minister must have control of all of the security forces and insist that terrorists and military organizations not under the control of the Palestinian Authority be disarmed and dismantled," State Department spokeswoman Amanda Batt said.
Saeb Erekat, a returning Cabinet minister, said Israel should stay out of Palestinian internal affairs. "The focus should be on reviving the peace process and ... implementing the road map," he said.
Hassan Khreishe, an independent legislator, said he expected the new Cabinet to win easy approval in parliament, which is controlled by Arafat's Fatah movement.
Khreishe, a frequent critic of Arafat, said the new government brings back ministers tainted by corruption, and he predicted Israel and the United States would shun the Cabinet.
"This is Yasser Arafat's government," Khreishe said. "He chose it just to send a message to the world that Yasser Arafat is the decision maker here."