The central committee of the mainstream Fatah movement met twice on Wednesday to end the impasse over the choice of a new interior minister, but both meetings failed to find a solution, party sources said.
A third meeting is to be held on Thursday morning, but one senior Fatah source believes neither side was showing signs of backing down.
Palestinian foreign minister-designate Nabil Shaath said the meeting was called in a continuing attempt to decide on the powers of the prime minister, interior minister and national security council, which Arafat chairs.
The main sticking point is Ahmad Quraya's choice of General Nasr Yusuf as interior minister with control over security forces.
Quraya's predecessor, Mahmud Abbas, quit in September after a similar dispute with Arafat over security powers.
The US State Department said overnight that Quraya must be given control over all the security forces for the peace process to continue.
Sharon, who returned overnight from a trip to Moscow, had planned to meet Quraya "within days" but the resumption of talks has been pushed back by the Palestinians' failure to form a government.
As both sides prepared for the eventual resumption of contacts, Israel announced it was partially reduce its blockade of Palestinian towns in the West Bank – except around Jenin and Nablus.
Roadblocks to Nablus affect all,
even the UN
The army's chief of staff, General Moshe Yaalon, sparked fierce debate last week when he warned that the uncompromising nature of occupation encouraged resistance.
Alternative peace plan
Meanwhile, moves to launch an unofficial alternative Mideast peace plan, dubbed the Geneva initiative, were postponed indefinitely, the Swiss foreign ministry said Wednesday.
The initiative, which was put together by Palestinian intellectuals and Israeli left-wingers, was originally to be launched on 20 November. The delay was thought to be related to funding issues.
Meanwhile, Israeli Prime Minister Ariel Sharon's office said he would seek cabinet approval on Sunday for a proposed exchange of 400 Palestinian and Lebanese prisoners.
The exchange would be made for an Israeli businessman seized by Lebanese Islamist group Hizb Allah three years ago and the bodies of three Israeli soldiers captured in October 2000.
The group claims Elhanan Tanenbaum, a kidnapped businessman and reserve colonel, was an Israeli spy.
Israel holds around 20 Lebanese detainees, including Shia scholars Abd al-Karim Ubaid and Mustafa Dirani, who were captured to be used as bargaining chips in any prisoner-exchange deal.
Ahmad Quraya unwilling to back
down over interior minister
The exchange should also include hundreds of Palestinians detained by Israel, a list of whom has already been handed by the Shin Beth internal security services to Ilan Biran, the reserve general in charge of the file on the Israeli side.
Woman shot dead
Meanwhile Israel, the target of countless motions by the UN General Assembly condemning its actions in the Palestinian territories, is planning to file within the next three weeks its own resolution on child victims of attacks.
But in the northern West Bank a Palestinian woman was shot dead and a teenager injured on Thursday after both were shot in the neck, Palestinian medical and security sources said.
The Palestinian woman, 38 year-old Imtiaz Abu Ras, was fatally shot inside her home in Nablus's old city, the Casbah.
The incident occurred shortly before dawn when around 10 Israeli tanks and more than 50 jeeps, backed by at least one
helicopter, pushed into the area provoking exchanges of fire with Palestinians.
A teenager was also seriously injured when Israeli troops pushed into Saida village north of Tulkarem and a gunbattle broke out with residents.