Each side is to form a negotiating team to implement the accords which include the withdrawal of Israeli forces from most parts of the Palestinian city of Hebron. Israel says that Mr Arafat promised that his Palestinian Authority will cease political activity in Jerusalem.
Explaining the government's decision to deal with Mr Arafat, whom it has previously demonised, an Israeli official said: "If we want to live in the past, we have a score to settle with every Arab leader... The government has decided that Arafat is a partner, and we will talk to him."
It is a measure of the success of Benjamin Netanyahu, the newly-elected Israeli Prime Minister, in lowering expectations about his adherence to Oslo, that his willingness to stick to a treaty already agreed has provoked a wave of optimism in the Middle East. In Israel the stock market, which dropped by a fifth following the election in May, immediately rallied.
In an attempt to get talks between Syria and Israel resumed, Dennis Ross, the US Middle East peace negotiator, has returned to the region. His performance has been severely criticised in Washington and his job is under threat, according to US press reports, although this has been denied by the State Department.
In the aftermath of Mr Netanyahu's trip to Washington - and the applause he received in Congress for his hard-line positions - Mr Ross is also expected to stress that the US still supports the peace-for-land formula in the Middle East.
Mr Arafat was also expecting to go to Damascus yesterday for talks with President Hafez al-Assad, with whom he has had almost no contact for 13 years. Syria expelled Mr Arafat and backed a rebellion against him in 1983. If, despite the present optimism, the Oslo accords begin to unravel, then Mr Arafat may feel he needs better relations with Syria.
In Israel, Mr Levy said yesterday that he was ready to meet his Syrian counterpart to try to break the stalemate in relations. "If the Syrian foreign minister is interested and peace is important to his country ... I am ready to meet him in any place and at any time," he said.
The better mood between the Israeli and Palestinian authorities reflects the fact that Mr Netanyahu is quietly defusing some of the issues that he used to win the election. For instance, his party insisted that the Palestinians had not revoked a section of the PLO charter calling for the destruction of Israel. Mr Arafat is now to write to Mr Netanyahu saying that the covenant has been changed.
During the election, Mr Netanyahu also said that Israel's control of Jerusalem was being eroded by the activities of the PLO operating from Orient House, the Palestinian headquarters in east Jerusalem, where right-wing demonstrators had gathered outside the building on one occasion. But given the lack of Palestinian political activity in the city, Mr Arafat's reported promise that they would cease, was easy to make.
With his main campaign themes Mr Netanyahu has made no concessions, however. He said he opposed a Palestinian state, discussions on Jeru-salem and a halt to Israeli settlement of the West Bank. In dealing with Syria he is against giving up the Golan Heights, captured in the 1967 war.
The number of Jewish settlers in the West Bank and Gaza Strip grew by 39 per cent, to 145,000, under Israel's previous government, the group Peace Now said yesterday. The Rabin government completed 10,000 homes begun under the right-wing government of Yitzhak Shamir from 1990 to 1992, and built 3,942 new homes. Settlers' babies - numbering between 15,000 and 16,000 - made up the remainder of the population increase.
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