Speaking after a meeting of the Fatah central committee, Qureia would only say that a new government would be formed in three weeks "with a new prime minister too."
If Qureia follows through, he would be the second Palestinian prime minister to give up the job amid disputes with Arafat since last month. However, with several more weeks in his term, he could reach a compromise with the Palestinian leader that would keep him in office.
Qureia currently heads an emergency, temporary Cabinet appointed by Arafat decree a week ago. When the Cabinet's term expires in three weeks, Qureia was to have formed a more permanent Cabinet to be confirmed by the Palestinian legislature.
But Qureia has been arguing with Arafat for days over who would be security chief in the new Cabinet and whether Arafat even had the authority to name an emergency Cabinet without legislative approval. During a heated fight last week, Qureia threatened to resign, just days after taking office.
Under an agreement worked out Sunday, Qureia and the six members of the emergency Cabinet who were sworn in last week would remain in place for another three weeks, without a security chief, Palestinian Foreign Minister Nabil Shaath said. The legislators would not be asked to confirm them.
At the end of that period, Qureia and the Cabinet would resign and a new government would be formed and presented to the legislature for approval, a senior Palestinian official said.
During a Fatah meeting over the crisis Sunday, Qureia told officials he did not intend to stay on as prime minister when the emergency government's term expires.
His predecessor, Mahmoud Abbas, resigned Sept. 6 after just four months in office, caught between Israeli demands for a crack down on militants and Arafat's refusal to give up any power over security forces.
Meanwhile, the Israeli army said it had withdrawn some troops from the Rafah refugee camp in Gaza, where it had been fighting for two days as it searched for weapons smuggling tunnels. Eight Palestinians were killed and local residents reported the army destroyed dozens of houses.
The argument between Arafat and Qureia centered on the appointment of Nasser Yousef as interior minister, a position that would make him the head of the security forces.
In the past, Arafat has demanded significant control over a portion of the security force. An independent-minded interior minister is seen as crucial to efforts to salvage the U.S.-backed "road map" peace plan, which calls for a crack down on Palestinian militants. Qureia has said he will not use force against militants.
Arafat, who named Yousef interior minister in the emergency Cabinet, withdrew his support for his longtime ally after Yousef refused to participate in the swearing-in of the Cabinet on Tuesday, Palestinian sources said Saturday.
Yousef said he wanted to wait until the government had parliamentary backing. Some saw that as a brazen slight to Arafat, who presided over the ceremony, and a signal of independence to U.S. officials hoping to marginalize Arafat.
The political troubles boiled over Thursday with the cancellation of the Palestinian legislature's vote on the emergency Cabinet — which would have turned it into a normal government. Some members of the legislature were also unhappy with the government's composition and did not want to legitimize a Cabinet that Arafat had appointed by decree.
Arafat said Saturday he wanted to replace Yousef with Hakam Balawi, a senior Fatah official, according to a Fatah official who spoke on condition of anonymity. Qureia said dumping Yousef now, just a week after he was named, would embarrass the government, a Palestinian official said.
Under the agreement Sunday, there would be no interior minister for now and security forces would temporarily fall under the control of the Arafat-headed National Security Council.
The Israeli military said Sunday it had reduced the size of its forces in Rafah in the southern Gaza Strip, but operations in the area were continuing.
Israeli soldiers battled masked Palestinian gunmen in the camp Saturday, for a second straight day. Israel was searching for tunnels used to smuggle weapons and drugs into Gaza underneath the border with Egypt.
Helicopters flew overhead and bursts of machine gun fire and loud booms echoed through the camp's narrow alleys.
A 19-year-old Palestinian was shot and killed Saturday, bringing to eight the number of Palestinians killed since Israeli forces moved into the camp Thursday night. Among the dead were two children. More than 70 Palestinians had been wounded, including 11 who were hurt Saturday.
The army said troops uncovered and blew up three smuggling tunnels.
Local officials said the army destroyed a significant part of the Yabena neighborhood, including its water and sewage treatment facilities, as well as 32 houses and a large number of vehicles. The army said that in such prolonged fighting significant damage was bound to occur.
An army spokesman said its troops encountered strong opposition in the camp and blamed part of the damage on Palestinians armed with rocket-propelled grenades and other weapons.
"This is a classic war against the Palestinian people," Shaath said.
The raid was part of stepped up military activity following last weekend's suicide bombing that killed 20 Israelis in a restaurant in the port city of Haifa.
Military officials, citing intelligence, said Palestinians might be planning to use the tunnels to bring in more advanced weapons, like anti-aircraft missiles and other weapons that could have a strategic impact on the three-year conflict.
Late Saturday, Israeli troops opened fire on three Palestinian militants who attempted to place an explosive device near the Jewish settlement of Morag in the Gaza Strip, the army said. It said one of the militants was killed.