The remarks were made in an interview with the Israeli newspaper Ha'aretz on Friday.
According to the paper, Palestinian Authority (PA) President Arafat said he "definitely" understood that Israel ought to "preserve her Jewish character" and that he personally recognised "Israel's Jewish identity".
Furthermore, Arafat told the paper that the PA had dropped an Arab summit resolution, calling for a just solution of the Palestinian refugee problem based on UN General Assembly Resolution 194.
The Israeli media featured Arafat's statements prominently, viewing them as a "significant change" of position on the plight of the refugees, considered one of the most insurmountable issues of the Israeli-Palestinian conflict.
The PA had always refused to or refrained from recognising Israel as a Jewish state for two reasons.
First, the PA leadership thought that lending such a recognition would seriously militate against the interests and future of Israel's 1.2 million strong Palestinian community, which makes up one-fifth of Israel's population.
Palestinian areas are turning into
'mass prisons' due to Israel's wall
Second, the PA understood all along that recognising Israel as a Jewish state would, in the final analysis, imply that the Palestinians were giving up on the right of return for millions of Palestinian refugees who were expelled from their homes when Israel was created in 1948.
That right is embodied in UN resolution 149 which stipulates repatriation and restitution for the refugees.
PA officials contacted by Aljazeera.net refused to comment on Arafat's remarks, saying they did not think that Arafat meant what the Israeli newspaper quoted him as having said.
One PA minister, who requested that his identity remain anonymous, said Arafat "doesn't necessarily mean every word he says".
"The president says a lot of things he doesn't mean. But in case he meant what he reportedly said, then it is a serious matter."
Another PA official said: "We don't take everything said or published by the Israeli press for granted."
Palestinian political leaders strongly denounced the idea of recognising Israel as a Jewish state.
Ziad Abu Amr, a professor of political science and a former PA minister, called Palestinian recognition of Israel as a Jewish state "the most stupid thing the Palestinians could do".
Israel has long pressured the PA
to recognise it as a Jewish state
"The Palestinian people and the world at large are under no obligation to recognise the Jewish identity of Israel.
"Israel is a nation-state and has no extra rights and privileges."
Abu Amr said recognising Israel as a Jewish state would amount to agreeing, at least tacitly, that one-fifth of Israel’s population would have to accept an inferior status.
"Who can tell the non-Jewish population of Israel that they must settle for an inherently inferior status vis-a-vis Jews and agree that they have lesser rights as citizens on no account other than being non-Jews?" argued Abu Amr.
Some Palestinian leaders seemed to deeply resent the timing of Arafat's statement.
"Nobody, not me,
not you, nor anybody else, whoever he may be, has any right to compromise the rights of Palestinians in Israel"
"It is ridiculous that such issues are raised at a time when Israel is narrowing Palestinian horizons and turning Palestinian population centres into mass prisons and detention centres by this annexation wall," said Palestinian political activist and public leader Mustafa Barghuthi.
He castigated Israel for insisting that the Palestinians recognise it as a Jewish state while the Israeli government is blocking the creation of a Palestinian state worth the name.
"So they [Israel] want us to recognise Israel as a Jewish state, not a state for all its citizens, and at the same time they are killing the very possibility of establishing a Palestinian state in the West Bank and East Jerusalem."
Barghuthi denounced "any Palestinian leader" who might "tamper with the rights and interests of our brothers in Israel proper".
"Nobody, not me, not you, nor anybody else, whoever he may be, has any right to compromise the rights of Palestinians in Israel."