JERUSALEM — Palestinian Authority Chairman Yasser Arafat took a calculated gamble when he met last week with Hamas and Islamic Jihad officials.

Coming just three weeks after the twin suicide bombing in Jerusalem's Mahane Yehuda market, Arafat's embrace of the militants drew sharp criticism from Israel and a somewhat muted response from the United States.

Despite the criticisms, Arafat had a clear goal in mind: to bolster his standing among his own people.

But in the long run, Arafat's success at strengthening his domestic position, as one senior Israeli defense official observed, may weaken his political maneuverability.

"He needs to rally all the ranks, to make sure that they will follow him," said Jamal Zakkut, a member of the Palestinian Authority executive committee.

From this perspective, the so-called "national unity" conference Arafat convened Aug. 20-21 in Gaza and in the West Bank town of Ramallah reflected his adeptness at political survival.

Arafat had been on a downward spiral. He and several of his key ministers were recently accused of financial mismanagement by members of the Palestinian legislative council. The accusations dealt a strong blow to Arafat's popularity.

The closure that Israel imposed on Gaza and the West Bank in the wake of the July 30 Mahane Yehuda bombing also hurt Arafat's standing among the Palestinian people, who were left reeling by the closure's harsh economic aftershocks.

But much has changed since last week's meetings.

Relations between the Palestinian Authority and Hamas, the two leading players in the Palestinian political arena, are better than they have been in a while.

And Arafat's political stock has risen, as evidenced by the number of Palestinians who prominently displayed his picture while demonstrating over the weekend against the closure. In addition, there is no longer talk about the charges of deep-rooted corruption in the Palestinian Authority.

At last week's meetings, Arafat flatly told Islamic militant leaders that he would not submit to Israeli demands that he crack down on terrorism.

Indeed, that stance marked a sharp departure from the arrests Arafat sanctioned after previous terrorist strikes against Israeli targets.

That crackdown, Israeli officials point out, did not last long. Far from arresting suspected terrorists in recent months, Arafat and his security officials have been giving them jobs.

The Palestinian police chief, Brig. Gen. Ghazi al-Jabali, recently said that more than 150 members of Hamas and the Popular Front for the Liberation of Palestine are working in key positions in the Palestinian police.

According to Israel, some 23 are terrorist leaders. Israel has charged that since January the Palestinian Authority has released from its jails another 14 terrorists.

According to the Israeli government, among those released were:

*Nabil Hassan Salam Sharihi, an Islamic Jihad member suspected of helping prepare the bomb used in the April 1995 attack in Gaza that killed American student Alisa Flatow and seven Israelis.

*Muhammad Hinawi, a Hamas member who allegedly participated in the May 1996 murder of David Boim, an American immigrant to Israel, near Beit El in the West Bank.

Israelis "think we will submit to their conditions," Arafat told the unity conference. "I say to them, `The Palestinian people are tough [and] don't submit except to their own wishes.'"

Referring to the 1987-1993 Palestinian uprising, or intifada, Arafat said, "All options are open to the Palestinian people," including a renewal of the revolt.

Arafat also told the gathering, "I am not Sa'ad Haddad," a reference to the late Lebanese officer who was the architect of cooperation between Lebanese forces and the Israeli army during the 1980s. Haddad was considered a traitor by his own people.

Arafat was making it clear to Israel that he might yet give the green light for a violent confrontation that would once and for all bury the moribund peace process.

Israeli Cabinet Secretary Danny Naveh viewed Arafat's meetings with the militant leaders as a slap in the face to Israel's security concerns.

"We have no doubt that despite Arafat's internal difficulties, he has the power to cope with the Hamas terrorist infrastructure had he wanted to," Naveh said.

Hamas and Islamic Jihad both oppose the peace process and have claimed responsibility for terror attacks that have killed scores of Israelis since both Israel and the Palestine Liberation Organization signed their first accords four years ago.

Israel has charged that Hamas operatives carried out the Mahane Yehuda attack, though the terrorists' identities have not been confirmed.

Some Israeli officials regard the unity conference as part of Arafat's traditional brinkmanship. "He is good at creating crises on the eve of fateful decisions," a senior security source said.

With U.S. Secretary of State Madeleine Albright expected in the region soon, some observers believe Arafat is purposely escalating the situation. That way, as an Israeli security source said, when Arafat makes concessions, they will be seen as a gesture toward the Americans, not the Israelis.

"We don't think that any of the leaders in the region who are our partners in the search for peace should leave any doubt that there is a tolerance for violence or terror," said U.S. State Department spokesman James Rubin, referring to Arafat's remarks at the unity conference.

"Arafat's escalation comes even at the cost of his own people," the security source said, citing the Palestinian Authority's partial boycott of Israeli products.