Given the events of the past months, which include Israel's banishment of 400 or so Palestinian Islamic militants in December, its seven-day bombardment of Lebanon a month ago, and the challenges to Mr Arafat over his autocratic leadership, his peace policies and the financial difficulties of the Palestinians, it may seem surprising that the Arabs publicly concede the possibility of achieving the first stage of a settlement.
Yet perhaps it is not so remarkable. The Arab states in confrontation with Israel - Syria, Jordan and Lebanon - are keen to work out some long-term security arrangements. What has been proposed is an Israeli pullout from the Gaza strip and Jericho on the West Bank as an initial phase.
The Israelis have long wanted to divest themselves of the teeming, violent and impoverished Gaza strip. Unlike the West Bank, it was not part of Eretz Israel, the biblical land of Israel. The Palestinians then proposed that they add to this Jericho, a sleepy town on the West Bank that has never been a focus for Jewish nationalist aspirations. Mr Arafat said he would leave some of the more intractable issues in the negotiations till later.
The 'Gaza-Jericho first' option is fraught with difficulties, however. Israelis and Palestinians have widely differing views of what it would entail. The Palestinians see it as a means of establishing a partial mini-state in territory now occupied by Israel. The Israelis see it as an interim solution. They want the Palestinians to demonstrate that they can manage a responsible self-governing authority before the Israelis will consider entering into negotiations on the final status of the territories.
Israel would withdraw forces from Arab population centres, as it must under the terms of the original invitation to the first round of Middle East peace talks in Madrid 22 months ago. But it would not cede sovereignty, and its troops would remain elsewhere in the West Bank.
Those who have been promoting the proposals - Israel's Foreign Minister, Shimon Peres, and Yasser Arafat's political adviser Dr Nabil Shaath - both have a reputation for confusing wishful thinking with reality; and both sides have an interest in not being seen as the obstacle to making peace in the region. That is one ground for being economical with optimism.
The message for all those who long for peace in the Middle East is that although the latest round of talks may not succeed in clinching an initial agreement, it is immensely encouraging that specific proposals concerning the occupied territories are being discussed for the first time, and that there have been direct contacts between the Israelis and the PLO. That is a basis on which a final settlement might eventually be achieved.