Can Yasser Arafat pass the 'Gaza test'?: Jerusalem is rewriting the Olso accord as the PLO struggles to survive, writes Sarah Helm from Gaza

YASSER ARAFAT, chairman of the Palestine Liberation Organisation, is keeping busy. In recent days he has negotiated police salaries and taken delivery of their winter uniforms; he's granted new licences for telephone lines and discussed his funding crisis with an American envoy; he has averted yet another resignation in his inner cabinet and listened to the woes of martyrs' families; and, he has mediated after a shoot-out and shaken the hands of a stream of notables.

Up in Jerusalem, meanwhile, Yitzhak Rabin, the Israeli Prime Minister, has been rewriting the terms of the Oslo accord, in a way that could further undermine hopes of a Palestinian state, secure in the knowledge that Mr Arafat is too busy with crisis-management to notice. Mr Rabin has let it be known this week that he thinks Palestinian elections should be delayed, and redeployment of forces in the West Bank put on hold.

Under the Oslo accord, the Gaza-Jericho stage of autonomy, which began on 4 May, should have lasted only three months. Limited self-rule was then to have been extended to the rest of the West Bank, theoretically before the end of the year, with West Bank redeployment taking place on the eve of Palestinian elections for a national council.

Instead, Mr Rabin has demanded that Mr Arafat remain ensconced in his enclave until he has passed a 'Gaza test'. Mr Arafat must prove to Israel that he can control Gaza and prevent all future anti-Israeli attacks. Only then, says Mr Rabin, can the autonomy experiment move on.

So far Mr Arafat has been failing. Almost no aid money has hit the streets. Strife is mounting between Mr Arafat's policemen and Islamic extremists, who continue to attack Israeli targets. The new Palestinian bureaucracy is burgeoning but powerless, as Mr Arafat makes all the decisions. Unemployment remains at about 60 per cent, and Mr Arafat's militias roam the streets, intimidating a confused population.

Terje Larsen, special United Nations co-ordinator on the Israeli-Palestinian issue, and a leading figure in the Oslo negotiations, said in Gaza this week: 'In the media there is a perception that peace is made. It isn't true. Under this agreement, peace has to be made again and again every day. If the experiment fails here in Gaza, it fails in the rest of the West Bank. If no viable and significant change takes place soon, Gaza could collapse in a state of civil war and bloodshed. Then we will have to say goodbye to comprehensive peace in the region.'

Mr Larsen gives the Gaza experiment another six to eight months. The question remains, however, is the 'Gaza test' one which Mr Arafat can pass?

Israel's prime demand is that the PLO round up the opposition Palestinian gunmen - particularly the militants of Hamas, the Islamic Resistance Movement, and Islamic Jihad, a smaller extremist group. To do so, however, is to run a real risk of civil war. Only last week Mr Arafat's hired guns tried to disarm members of Izzidin al Qassem, the military wing of Hamas, which led to a Palestinian policeman's death. Few Gazans would support a PLO crackdown on Hamas. The wounds left by the Israeli occupation are still labile; there are still armed settlers.

Alternatively, Mr Arafat could try to neuter Hamas by co-opting them in a political deal. Pragmatic as ever, the Islamists met Mr Arafat this week to 'negotiate'. As a gesture to his main political rivals, he attended prayers at a mosque.

For Mr Arafat, however, power-sharing with even his closest allies is anathema. Mr Arafat's only real option is to secure lasting economic improvement, thereby building PLO legitimacy and marginalising extremists. It is nearly one year since the much hailed 'pledging conference' when donor nations pledged dollars 2.4bn (pounds 1.53bn) in aid to the Palestinians. Almost none of this money has been forthcoming. A shaky Palestinian tax system is only now being formed. Palestinian investment is stymied by a lack of confidence in the future, and the absence of clear rule of law. And it is Hamas, not the PLO, which is extending its mosque- based social network winning more support.

The block on the aid money has been due, in part, to Mr Arafat's continued refusal to meet World Bank demands that he set up accountable institutions, to satisfy the donors. They must be 'Palestinian institutions', he says, and under his personal control.

As the financial crisis has mounted, funds for emergency running costs have been 'drip fed' to the authority by donors, and the United Nations has stepped up its role in a bid to keep Mr Arafat afloat. At the same time some donor countries have broken World Bank 'discipline', signing direct bilateral deals with Mr Arafat. Such deals, however, are heavily criticised as they are done as much to serve the interests of the donors wishing to promote a pet project, as the interests of the Palestinians.

Many Palestinian professionals and intellectuals, familiar with Mr Arafat's autocratic ways, dared hope that donors might oblige him to conform to democratic and human-rights standards in return for their aid. 'It is a dangerous Catch 22. If Arafat does not get any money he will not be able to build his institutions or maintain his support. If he does get money without any strings attached, it may be at the expense of democracy and long-term stability,' says Ziad abu Amr, professor at Bir Zeit University on the West Bank.

Mr Rabin, meanwhile, appears to have little desire to help Mr Arafat pass his 'Gaza test'. He has not yet considered dismantling settlements which, by their very presence, undermine Mr Arafat's legitimacy. And by raising doubts about his commitment to full Palestinian autonomy in the West Bank, the Prime Minister has deterred major donors from spending money. A clear split is now opening up in the Israeli government between the 'Oslo doves', under Shimon Peres, the Foreign Minister, who always believed the peace process should and could lead to a Palestinian state, and the hardliners around Mr Rabin, who are now back-pedalling and proposing a minimalist low-risk approach.

There are growing Palestinian suspicions that Mr Rabin wants to leave Mr Arafat spinning on his heels in Gaza for as long as possible. Under this scenario Jericho would remain a tiny, anomalous PLO entity, and the rest of the West Bank a satellite of Jordan.