Yasser Arafat "definitely" understands that Israel must preserve its character as a Jewish state, the Palestinian Authority chairman told Haaretz in an interview this week.

This is the first time Arafat has said he recognizes the state's Jewish character - he had previously refrained from doing so, to avoid offending Israel's Arab citizens.

In the interview at his office in Ramallah on Tuesday, Arafat pointed out that the PLO had adopted the Arab Summit resolution of April 2002. This resolution, based on a Saudi initiative, called for a just and agreed solution to the Palestinian refugee problem based on UN General Assembly Resolution 194.

However, he declined to say how many refugees he would insist Israel absorb as a condition for any peace agreement. He stressed that he had to solve the problem of some 200,000 refugees who live in very difficult conditions in Lebanon, and asked "why the Christians from Russia have the right to come and the Palestinian Christian has not the right to come?"

Amos Malka, the former head of Military Intelligence, told Haaretz in an interview published last Friday that Arafat would be willing to compromise on the return of only 20,000 to 30,000 refugees to Israel.

Regarding borders, Arafat essentially confirmed Malka's assessment - that he would be willing to sign an agreement under which Israel would withdraw from 97 to 98 percent of the West Bank and give the Palestinians territory equivalent in size and quality to the 2 to 3 percent that would be annexed to Israel. He also said that under any agreement, Israel would retain sovereignty over the Western Wall and the Jewish Quarter of Jerusalem's Old City, and Israelis would be granted freedom of access to holy sites under Palestinian control. The Palestinians would require sovereignty over the rest of East Jerusalem, including the Temple Mount.

Arafat said that he was puzzled that the Israeli government does not view him as a partner for peace, pointing out that even Prime Minister Ariel Sharon had sent numerous messages to Arafat via his son, Omri. Sharon also accepted various diplomatic and security initiatives - including the road map - that were formulated in consultation with Arafat.

Arafat pledged that once the Israel Defense Forces withdraw from Gaza, the PA would take control of the area and fight not only Hamas members, but also Fatah members who seek to break the law.

He noted that British intelligence, which is monitoring the security situation in the territories on behalf of the Quartet, recently published a positive report on the Palestinian security services' efforts to foil suicide bombings in Israel.

In one case, Palestinian police arrested a 17-year-old Bedouin girl who had planned to blow herself up in Israel. The arrest took place in a part of the territories that is under full Israeli security control.