LAURIE DHUE, HOST:

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YASSER ARAFAT, PALESTINIAN AUTHORITY PRESIDENT:  Let us come back to the peace process, for our children and for their children, the peace agreement, which I had signed with my dead partner (UNINTELLIGIBLE) Rabin.

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DHUE:  Calls for peace from Palestinian leader Yasser Arafat in an exclusive interview with our own Rita Cosby last night.

Hello, and welcome back to The War on Terror.  I'm Laurie Dhue.

Keeping the report on the Middle East turmoil fair and balanced, Rita traveled to southern Israel to get the other side from Israeli Prime Minister Ariel Sharon.

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RITA COSBY, FOX CORRESPONDENT:  You're regarded by many as a warrior.  You were a general, still a general, fought in the army.  Are you now a warrior for peace?

ARIEL SHARON, ISRAELI PRIME MINISTER:  (UNINTELLIGIBLE) really have seen all the horrors of wars and (UNINTELLIGIBLE) understand (UNINTELLIGIBLE) peace maybe better than many of the politicians that talk about peace and never had it experienced.  For me, peace should provide security to the Jewish people.

COSBY:  You have said that PLO Chairman Yasser Arafat has made himself irrelevant.  Have you made him irrelevant by boxing him in, by isolating him, by not allowing him to go to the Christmas eve mass in Bethlehem?

SHARON:  Mr. Arafat made himself to be irrelevant because he decided to choose strategy of terror instead of strategy of peace.

COSBY:  Some say having allowed Arafat to go to Bethlehem would have been a gesture of good will.

SHARON:  He's never done anything, so what kind of gesture (UNINTELLIGIBLE) needs more?  You have to take steps, not gestures.  It's a matter of life of people, of civilians.

COSBY:  The was a story that I think you recounted in which an Israeli soldier had the opportunity to shoot Yasser Arafat, that he had him in his crosshairs 20 years ago and didn't shoot because it would have violated the ceasefire.  And you said, "Maybe too bad because maybe we would have gotten a more pragmatic leader."  Is that story true?

SHARON:  I instructed not to shoot because I think that when you sign an agreement, you have to implement it.  You have to -- you are committed to it.

COSBY:  Do you think Arafat should at least be commended on some of the steps he has taken?

SHARON:  Even those few that were arrested are not in prisons.  They are kept in private apartments, beautiful apartments.  They have their weapons with.  They have their communication with.  They can go in, they can go out, and then come in every time they would like.  And we demanded from Arafat one thing, is to arrest the heads of the Popular Front, which live by him in the same town.  The headquarters is by Arafat headquarters.  And the two of them, the commander and the second command, which were directly in charge of instigating the murder of a member of the Israeli cabinet, Minister Zeevi (ph).  And also, we ask him to arrest the two murderers.

COSBY:  Now, I spoke...

SHARON:  And...

DHUE:  I spoke with Arafat, and Arafat says he doesn't know where these people are.

SHARON:  I was born here, and we have been living together with Arabs all our life.  Even for us, it's very hard to understand that people like Mr. Arafat are looking into your eyes and lie.  It's an empire of lies.  Arafat has been talking about -- he got the slogan always "peace of the braves" that he has been using.  I'll tell you what Arafat brought to us, that is the peace of the graves.  That's what (UNINTELLIGIBLE) That's what really he has done.

COSBY:  Some say that there is no true replacement for Arafat.  Everyone believes that there's no true replacement for him.  Isn't it in your best interest to make him, then, relevant again because you have to deal with the Palestinians?

SHARON:  But we have not decided to take any steps against Arafat.  It's about being replaced.  I know it's hard to admit, but in the end, every one of us is going to be replaced, so it's -- but I think it's the wrong assumption that if Arafat one day -- not by us, I would say -- will not be, that the Hamas or the Islamic Jihad, they will take over.  I don't think that -- our evaluation that that will not happen.

COSBY:  You have compared Arafat to Usama bin Laden.  How so?

SHARON:  One should be judged by terror, by his acts.  He caused thousands of killed.  Thousands!  And thousands and thousands of injured.  One should be judged by the results, and the results were murder and killing.

COSBY:  Did the Israeli Mossad, considered one of the best intelligence services in the world, provide any warning whatsoever about the September 11th attacks to the United States?

SHARON:  There were general warnings, but it was a terror act in the World Trade Center before (UNINTELLIGIBLE) several years ago.  I think that what we had been warning all those years about the danger to the world, to stability in the Middle East and to the free world, of terror.

COSBY:  Is there a military solution to the Palestinian problem?

SHARON:  We don't have any intention whatsoever to use military force to solve the Palestinian problem.  But when it comes to terror -- when it comes to terror, I believe that military -- the right military steps is a very, very complicated kind of warfare, where I make every effort not to escalate the situation.  There's not going to be any escalation here.  I would say it's -- the answer to those specific problems are military answers.

COSBY:  Your foreign minister, Shimon Peres, has been engaged in talks with the lieutenant for Yasser Arafat.  What is the status of those talks right now?

SHARON:  They are saying that they reject it totally, but they would like to continue -- they would like to continue the talks.

COSBY:  Secretary of State Colin Powell has been very critical of the Palestinians, but also said that the Israelis have some obligations, too.  And he recently said only a few days ago that the settlements must stop.

SHARON:  I'm a friend of Colin Powell.  We talk quite often.  And of course, I'd be very glad to have the support of -- I would say the full support, but it's not always that you can get the full support.  We live here.  We have our security problems, and we have to defend ourselves.

COSBY:  You ran on a banner of peace and security.  So far, you have not been able to deliver either.  In fact, both have deteriorated since you came into power.  Are you disappointed?  Are you frustrated?

SHARON:  I know that it's a very long struggle.  It will take a long time.  We cannot (UNINTELLIGIBLE) that immediately.  And therefore, as long as I continue with my effort to bring security -- and we have many achievements.  We have not accomplished that.  It will take time.  It needs determination.  It needs patience.  It's needs -- it's a major effort.  And I'm looking forward to reach peace.  (UNINTELLIGIBLE) shows that I believe in that.

I know it's a long struggle.  But you must understand the Jews, as a nation, as a people, have been (UNINTELLIGIBLE) now for 4,000 years.  We have time.  We'll make an effort.  We are not waiting.  We are building.  We are developing.  And of course, we have this dream and this commitment to reach peace.  That is our dream.  That's our commitment.

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DHUE:  Ariel Sharon talking in an exclusive interview with Rita Cosby.  Rita, thank you.