Palestinians reject Sharon's plan for state in 40% of West Bank

Ariel Sharon gave details for the first time yesterday of the sort of Palestinian state he is prepared to agree to under a US peace plan ­ and the Palestinian leadership immediately rejected the proposals.

The Israeli Prime Minister described a state existing only in areas of the West Bank and Gaza Strip that were put under real or nominal Palestinian control as part of the Oslo peace process ­ that is, only in Palestinian population centres.

He also claimed al-Qa'ida had established a presence in Palestinian areas of Gaza and in Lebanon. His claim was denied by a member of the Hizbollah guerrilla group in Lebanon and by a Palestinian official, who accused him of looking for an excuse to invade Gaza.

The Palestinians want to establish a state on all of the occupied areas that Israel has annexed ­ in the West Bank and Gaza Strip, as well as east Jerusalem. The area Mr Sharon has proposed for any new state accounts for only about 40 per cent of the West Bank and 70 per cent of the Gaza Strip.

President George Bush has called for a Palestinian state as part of a peace deal, and Mr Sharon said that if he won national elections in January ­ as the polls are clearly predicting ­ he would form a government based on Mr Bush's framework. But the Israeli Prime Ministerrejected the timetable in the US proposal, which calls for a Palestinian state by 2005. "Implementation on the ground, not a calendar timetable, will be the determining factor," Mr Sharon said.

He said he would insist on the end of militant attacks and a new Palestinian leadership in place of Yasser Arafat before he agreed to Palestinian statehood. Mr Sharon said he would establish "territorial contiguity" in a Palestinian state ­ that is, he would make it possible for Palestinians to travel around it without passing through Israeli-controlled areas or checkpoints.

"This will not fly," said Saeb Erekat, a Palestinian cabinet minister Mr Arafat allows to speak on these matters. "The only road to peace is when Israel withdraws to the June 1967 borders." Israel captured the West Bank including east Jerusalem and the Gaza Strip in the 1967 war.

Meanwhile, details of Mr Arafat's allegedly murky financial dealings ­ and of a senior Israeli peace envoy's involvement in them ­ emerged yesterday. Yossi Ginossar, an Israeli businessman who acted as a special envoy to Mr Arafat for three Israeli prime ministers, allegedly set up a secret Swiss bank account for Mr Arafat and Mohammed Rashid, a senior aide. Mr Ginossar transferred more than $300m (£191m) of official Palestinian Authority money to Switzerland, according to a report in the Israeli newspaper Ma'ariv yesterday.

Mr Rashid later withdrew the money, which has since disappeared, the newspaper said. The paper said it learned of the secret dealings from Ozrad Lev, who was working with Mr Ginossar at the time. There have been frequent allegations of corruption against Mr Arafat and the Palestinian Authority, and many Palestinians believe their leadership is corrupt. The involvement of a senior Israeli peace envoy will trouble many in Israel.

Mr Ginossar said he was acting at the time as a private citizen. But for 19 years Mr Ginossar worked in the Shin Beth security service. He left after reports revealed that he had been put on a committee investigating a bus hijacking to cover up how Shin Beth agents killed two of the hijackers.

Mr Sharonordered an enquiry yesterday into claims that Mr Ginossar ran Mr Arafat's Swiss bank account.