But Israel swiftly dismissed the veteran leader’s initiative as a ploy to avoid threatened expulsion.
The letter on Monday cited conditions, including an international observer force to help enforce a quartet-backed “road map” aimed at ending the Palestinian-Israeli conflict.
Israel has categorically rejected the deployment of international observers.
The quartet includes the European Union, United States, United Nations and Russia.
Arafat received envoys from the EU, UN and Russia in his half-demolished compound in the occupied West Bank city of Ram Allah where Israeli forces have confined him for almost two years.
US envoys were not at the meeting since Washington has sidelined Arafat for allegedly instigating violence, a charge he denies.
Tensions have been high between the two sides after Israel assassinated a Hamas activist on Monday.
Hizb Allah working to secure
Marwan Barghouti's (C) release
But in a move that could ease tensions, a deal appeared to be in the making under which Israel would release Palestinian activist Marwan al-Barghouti, in a prisoner swap brokered by Lebanon’s Hizb Allah resistance group.
A Palestinian source close to the negotiations said Israel had agreed in principle to release about 400 Arab detainees, including at least 200 Palestinians.
The source said al-Barghouti, the most senior Palestinian held by Israel, tops the list of those Hizb Allah seeks to free, adding negotiations on the names of those to be released are continuing.
But Israeli Public Security Minister Tzachi Hanegbi was quoted on Tuesday as saying al-Barghouti would not be released, adding if Palestinian activist's trial continued he could serve "dozens of years behind bars".
A senior security source said it would be “unthinkable” to free al-Barghouti, who was standing trial in Israel for alleged involvement in resistance attacks that left 26 Israelis dead. He denied the charges.
Al-Barghouti is the leader of Arafat's Fatah movement in the occupied West Bank.
Talks making headway
Sayyid Hasan Nasr Allah believes
a solution is close
In Beirut, Hizb Allah Secretary General Sayyid Hasan Nasr Allah said in an interview he expected a “comprehensive solution soon”.
As part of the deal, Hizb Allah would exchange Elhanan Tannenbaum, who the resistance group says is a Mossad agent, and three Israeli soldiers. They were all captured in October 2000.
Israel would release at least 19 Lebanese, including top Hizb Allah leaders Shaikh Abd al-Karim Ubeid and Mustafa Dirani, kidnapped in 1989 and 1994 respectively.
Israel is also seeking information on navigator Ron Arad, whose plane was shot down over Lebanon in 1986.
Nasr Allah said his group would try to find out more about the fate of Arad.
“We are actually interested in uncovering Arad’s fate,” he told a Lebanese newspaper. “We have many motives and reasons which prompt us to continue searching for him.”
Hizb Allah ousted Israeli forces from south Lebanon following a 22-year occupation in May 2000.