Eleven of the 15 Security Council nations voted in favor of the resolution and three abstained: Britain, Germany and Bulgaria.
Syria, the only Arab nation on the Security Council, had been pressing for a vote since last week's decision by Israel's security Cabinet to "remove"Arafat in a manner and time to be decided.
At a council meeting Monday, virtually all the more than 40 speakers condemned Israel's threats against Arafat.
U.S. Deputy Ambassador James Cunningham informed the council Tuesday morning that the United States would veto the latest draft. The council put off a vote for several hours, and some council members expressed hope that a compromise could be found but none was offered.
Immediately after the vote, America's U.N. Ambassador John Negroponte reiterated that the United States doesn't support the elimination or forced exile of Arafat and believes that his diplomatic isolation is the best course.
He said the United States was forced to use its veto because the resolution failed to name groups such as Hamas and the Al-Aqsa Martyrs Brigade, which has claimed credit for numerous suicide bombings and other attacks against Israelis.
"The Palestinian Authority must take action to remove the threat of terrorist groups,"he said.
Israel blames Arafat for sabotaging the peace process.
Cunningham said he told council members that the latest text was unacceptable because it would not promote the peace plan known as the "road map,"which is backed by the United States, the United Nations, the European Union and Russia.
Britain, which holds the council presidency this month, proposed amendments on Monday dealing with implementation of the "road map,"but Syria rejected them.
Syria's U.N. Ambassador Fayssal Mekdad expressed regret at the vote, calling the resolution "highly balanced,"and noting that most of the language came from previous resolutions that had been adopted by the Security Council.
"The fact that the U.S. delegation used its veto is something extremely regrettable," he said. "It only complicates a situation in the Middle East that is already very complicated."
Last Friday, the 15 council members including the United States agreed on a press statement expressing "the view that the removal of chairman Arafat would be unhelpful and should not be implemented."
But Cunningham stressed that a press statement on a single issue was far different from a legally binding Security Council resolution.
"Extracting that one piece of the situation and embedding it in a Security Council resolution that has a lot of other things wrapped around it is a different proposition," he said.