The Palestinian Authority approved the Ben-Eliezer proposal in principle. But leaders of the dozen or so Palestinian paramilitary organizations were highly critical of the Palestinian Authority’s decision, seeing it as a trap to legitimize Israeli occupation of Palestinian cities.

Some even suggested that Arafat was buying into the proposal in a desperate attempt to regain his “relevance” on the international stage.

Israel was equally emphatic in its suspicion of Palestinian motives. Israeli Prime Minister Ariel Sharon declared at Sunday’s Cabinet meeting that Palestinian Authority approval of the “Gaza First” idea was “simply a ruse to please the Americans” while a Palestinian delegation was talking with Bush administration officials in Washington.

The very name of the “Gaza First” plan — which recalls the “Gaza and Jericho First” plan that in 1994 initiated Palestinian Authority rule under the Oslo accords — symbolizes the extent to which the two-year-old intifada has rolled back the gains of years of peacemaking and trust-building.

Israelis were equally skeptical of reports that Palestinian factions were once again on the verge of pledging not to attack Israeli civilians, at least inside Israel proper.

Palestinian officials had claimed they were about to issue a cease-fire in July until Israel assassinated Salah Shehada, the head of Hamas’ military wing in the Gaza Strip, killing some 15 civilians in the process.

Palestinians staged several spectacular terrorist attacks, ostensibly in revenge for Shehada’s death. But then they again considered the possibility of declaring a cease-fire — albeit one that would sanction attacks on Israelis in the West Bank and Gaza Strip.

Israelis dismissed the talk as a public relations exercise or as diplomatic cover that would allow Palestinian fighters to regroup and prepare for future attacks.

They also feared a repetition of Israel’s experience in Lebanon, where the two sides agreed on a moratorium on attacking civilians. In practice, that allowed Hezbollah fighters to shelter behind Lebanese civilians while attacking Israeli soldiers.

All those questions appeared to become moot early this week, however, as the Palestinian factions dropped the cease-fire initiative and instead called for continued attacks.

“We stress the legitimacy of our resistance against” the Israeli “aggression and the occupation, and the Israeli settlements,” the groups said in a draft statement. The statement affirms both violence and “political work” as legitimate tools toward the Palestinians’ goals.

Beyond the bluster, however, some Israelis detected signs that the intifada’s physical, economic and diplomatic toll was exhausting the Palestinians.

The fact that Palestinian Authority President Yasser Arafat’s Fatah movement was reaching out to other groups to consider even a partial cease-fire shows a recognition that the war against Israel has failed, and that Palestinians are searching for a way out, some Israeli analysts said.

For several weeks now, the “Supreme Intifada Monitoring Committee,” an umbrella group of all Palestinian factions, has been working on a covenant meant to produce a joint, binding definition of Palestinian goals and the means to achieve them. It also grapples with the need for reform of Palestinian Authority institutions.

Palestinian spokesmen insist the covenant is not meant as a concession either to Israel or America, where President Bush in late June demanded comprehensive Palestinian Authority reforms, including Arafat’s replacement, as a condition for Palestinian statehood.

The covenant was to have been signed in mid-August, but the signing ceremony was deferred when Hamas officials asked for more time to consider their position. Earlier, the Latin Patriarch of Jerusalem, Michel Sabah, met Hamas leader Sheik Ahmed Yassin in Gaza to advance agreement on the covenant.

Israelis, meanwhile, asked how much of this development constituted genuine change on which new peace agreements could be built? To what extent was it tactical maneuvering to enable battered terrorist groups — which the Palestinian Authority is obligated to disband rather than co-opt — to regroup and fight another day? How much of it was simply a way for the discredited Arafat to hang on to power?

Part of the Israeli mistrust stems from the fact that the covenant would establish a joint Palestinian decision-making body that includes all Palestinian factions, with Arafat at its head. This could simply be another way for Arafat to retain power — and as long as he does, Israelis argue, nothing positive will happen. To help overcome the mutual mistrust and create conditions for a cease-fire, the Americans are pushing ahead with plans to reform the Palestinian security services. After spending several weeks in the region, a CIA team recently made detailed recommendations for changes in the structure, assignment, operation, recruitment and training of the Palestinian security services, which would be placed under a unified command. The Americans also will soon send an envoy to the region to assess reforms in Palestinian government and economic procedures.

But in their dealings with the Palestinians, the Americans, and the Israelis for that matter, face an acute dilemma: In order to promote the reform program they need to talk to Palestinians in positions of authority, but often those Palestinians are close confidants of Arafat, the man the reforms are supposed to sideline.

In early August talks in Washington, for example, Saeb Erekat said openly that he was there representing Arafat. It is, therefore, by no means clear whether the reforms and the strong undercurrent of Palestinian criticism of the leadership are pushing Arafat out, or whether Arafat is controlling the reforms and the protesters to solidify his grip on power..

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