Palestinians, led by none less than Arafat himself, reacted to the Israeli decision with unrestrained rage.
"Arafat is an obstacle to peace and Israel will take steps to rid itself of that obstacle," an Israeli cabinet statement said. The Israeli army has been asked to prepare a plan for Arafat's exile.
But an immediate expulsion of the 74-year old Palestinian leader has been kept on hold for the time being keeping in view US opposition.
Palestinian prime minister-delegate Ahmad Quraya shelved efforts to form a new government, saying Israel's decision will "blow up" the entire region.
"This step undertaken by the Israeli government is a dangerous act that threatens every opportunity for peace," he said in a statement.
Quraya agreed to accept a nomination from Arafat to become prime minister on Wednesday.
Outpouring of support
Thousands of Palestinians rallied to the veteran leader's compound in the occupied West Bank city of Ram Allah late on Thursday.
Arafat vowed to stay put in his headquarters as Palestinians poured onto the streets of cities across the West Bank and Gaza Strip after word spread he would be expelled.
"You are brave people, my loved ones. Abu Ammar is staying here," he said, using his nom de guerre while blowing kisses to the masses who had gathered.
Members of Arafat's Fatah movement urged civilians to remain around the clock outside of the president's headquaters to protect him from any Israeli attempt to remove him.
"No one can kick me out. They can kill me with bombs but I will not leave," Arafat told reporters earlier.
Veteran leader vowed Israelis
would never take him alive
Islamic Jihad, the Palestinian resistance group, also promised to stand up to the Israeli threat of expelling Arafat.
Its spokesman said Palestinian resistance would intensify if the leader was to be expelled.
"It would lead the region into a cycle of violence and the Palestinian people are ready to defend our leaders and our rights," spokesman Khaled al-Batch said.
Nabil Abu Rudeina, a top aide of Arafat said Israel "will pay a high price" if it expelled the Palestinian leader.
Warnings for Israel not to carry out its threat came swift.
The United States said any expulsion of Arafat would only give him a greater stage to operate from outside the region, while the European Union urged Israel to weigh the consquences of such a move.
For its part, Egypt warned that violence would explode across the occupied Palestinian territories.
"No one can kick me out. They can kill me with bombs but I will not leave"
Yasir Arafat, Palestinian President
Asked whether Cairo would take Arafat as an exile, Egyptian President Hosni Mubarak said: "The question is not whether we would welcome him. We, like any Arab country, would welcome him. The question is another. If we talk of expelling him we are making a huge error."
But some political analysts say Israel's threat amounted to an ultimatum to the Palestinians to crackdown on resistance groups.
"It is more of a political threat, an ultimatum," said Eli Karmon, an Israeli "counter-terrorism" expert.
That the Israelis were planning to act tough against Arafat were obvious even earlier during the day when tanks took up positions near the Palestinian Authority compound in Ram Allah.
It triggered immediate fears that the Israelis were planning to forcibly remove or possibly assassinate Arafat.
The Israeli decision followed Tuesday's bombings in Tel Aviv and Jerusalem, that left at least 15 Israelis dead.
Having cut short his India trip, Israeli Prime Minister Ariel Sharon chaired the security cabinet meeting.
The decision to expel Arafat came amid growing calls from Israelis to either expel or kill the Palestinian leader.