"Some unacceptable mistakes have been made by our institutions and some have abused their positions and violated the trust that has been placed in them," Arafat said on Wednesday in a keynote speech to MPs at his West Bank headquarters.
Arafat has been under immense pressure to tackle what opponents regard as rampant corruption among government officials.
He also acknowledged failures in enforcing security in the West Bank and Gaza Strip and pledged to back his Prime Minister Ahmad Quraya in efforts to tackle the crisis.
"No real efforts have been made to enforce law and order," Arafat said.
"More efforts and support should be made for the security of the people and this is the responsibility of the security organisations."
Quraya submitted his resignation last month after mass Palestinian protests amid major accusations of corruption against Arafat and his authority
But he later retracted his decision after lengthy mediation efforts involving other senior Palestinians and deputies.
With Quraya sitting alongside Arafat in the headquarters known as the Muqataa, Arafat again said he would do everything in his power to help the the prime minister tackle the security situation.
"I support my brother Abu Alaa (Quraya) and I give him my full support to implement this."
World leaders, including UN Secretary-General Kofi Annan and US Secretary of State Colin Powell, have been pushing Arafat to loosen his grip over the security services which allow him to still exercise power in the territories.