Following is a transcripted excerpt from Fox News Sunday, May 12, 2002.

TONY SNOW, FOX NEWS: Good morning, and happy Mother's Day from Washington. We'll talk with our guests after the latest from Fox News.

We start in the Middle East, where there are some important military and political developments. Here's Fox News correspondent David Lee Miller in Jerusalem.

DAVID LEE MILLER, FOX NEWS: Thanks, Tony.

For the first time in more than a month, Israeli forces are now out of all Palestinian-controlled territory. Israeli reservists called up for an attack on Gaza have been told they can go home after the army put on hold plans for a military strike. But according to Israeli army radio, some reservists have been placed on standby in the event the situation changes.

Israel's military planned to strike in retaliation for a suicide bombing last week that killed 15 civilians. While officials say the operation was postponed after details were leaked to the media, analysts here say another consideration: pressure from Washington.

In Bethlehem, life has started to return to normal. At the Church of the Nativity this morning, various Christian denominations attended services, including a delegation sent by the Vatican. Those who have been inside the 4th-century church say it has been well scrubbed, with incense replacing the stench of urine and human waste caused by the five-week siege.

Israel's prime minister Ariel Sharon's Likud Party is meeting in Tel Aviv today, and on the agenda: a potentially explosive resolution opposing the establishment of a Palestinian state. Adoption of the resolution urged by supporters of the former Prime Minister Benjamin Netanyahu contradicts Sharon's position on the issue and could be an embarrassment for the prime minister.

Also today, leaders of Egypt, Syria and Saudi Arabia have reaffirmed their commitment to a peace plan with Israel that calls for the Jewish state to withdraw to pre-'67 borders. The three met in the Egyptian resort town of Sharm el Sheik. In a joined statement, they urged all countries to stand by Arab rights.

And finally, the New York Post is reporting in today's edition that Israel recently sank a ship off the coast of Gaza that was ferrying weapons to the Palestinians. According to the report, the vessel was bringing weapons that were provided by the Iranian-backed Hezbollah. A spokesman for the Israeli defense forces say they know nothing about this incident, but it was only last January that another ship, the Karine A, was captured after it was bringing some 80 tons of rockets, mortars and other weapons.

Tony, back to you.

SNOW: Thanks, David.

In other news, U.S. intelligence sources now believe the major remaining Al Qaeda forces have fled to Pakistan. Those sources describe Pakistani officials as reluctant to permit large-scale offensives within their borders. Pakistan's uncertainly, in turn, has hampered efforts to capture or kill Al Qaeda fighters.

Former President Jimmy Carter is in Cuba today for the start of a five-day visit. The Bush administration and Cuban exiles hope Mr. Carter will push the causes of human rights and democracy when he meets with his host, Fidel Castro. Mr. Carter has said his trip is a private one. The visit marks the first time any current or former American president has visited Cuba since Castro seized power more than 40 years ago.

Now, as we mentioned, there have been a lot of developments in the Middle East. Joining us to discuss the latest diplomatic, political and military developments in the region is America's former top peace negotiator, Dennis Ross, a Fox News foreign news correspondent and director of the Washington Institute for Near-East Policy.

Mr. Ross, let's begin with a question of Israel entering the Gaza Strip. That has been called off for now. Do you think that means that Israel is going to take no action, military or otherwise, against the Hamas forces that have claimed responsibility for last week's homicide bombing?

DENNIS ROSS: I think we're not going to see any immediate action by the Israelis, but I think they will hold their options in reserve. If, in fact, they get intelligence, they'll act.

I think what we're seeing right now with Israel is that they're going to base everything on the intelligence they get. They're going to reserve the right to act when they feel that there's an imminent threat, and they're going to go to preempt that threat.

SNOW: When you say "on the intelligence they get," would that deal with the whereabouts of known Hamas terrorists? And if so, they would not be dispatching tanks but rather small squads designed to go out and rout out certain individuals or cells?

ROSS: Typically, yes. I wouldn't rule out larger operations that would include armor, but I think the nature of Gaza lends itself less well to that.

ROSS: Bear in mind one thing. They are right now, from the interrogations they're conducting with all those that they have arrested, they are mining an enormous amount of information, and I think that information will lead to additional actions by the Israelis. The longer the time period goes on, obviously, the less good that intelligence. But clearly in the near term, it's producing a lot for them, and I think that's what's going to govern their incursions.

SNOW: Do the Israelis believe, at this point, that they have effectively disabled terror networks that are being run by Hamas and other groups in the region?

ROSS: They know that what they've done is not an answer. They know that what they've done is disrupt the capacity to carry out attacks against them. It doesn't mean that all will stop. It means that it will be harder to conduct the kinds of attacks that we saw. It means you're not going to see six suicide bombings in six days.

But they also know the most it's going to produce is a respite. At some point, the infrastructure will be rebuilt. At some point, you'll see new people to lead these operations, to organize these operations, to recruit for these operations.

So it's a matter of time. But at this point, the environment here in Israel is dramatically different from what it was. People are more relaxed, they're more confident. They know this isn't the end of the story, but they also feel, at this particular point, a good deal less vulnerable than they did.

SNOW: Egyptian, Saudi and Syrian leaders have met in Sharm El Sheik, Egypt. They say that they have not only reaffirmed their belief in peace or their desire for peace, but there are also rumors that the Saudis especially say that they're going to place increased pressure on Yasser Arafat to tamp down on violence. What are you hearing about that?

ROSS: I think that what you're hearing in that regard is right. I think you're going to see from the Saudis, the Egyptians and Jordanians a good deal more pressure on Arafat to control the situation, to affect the environment.

There are several reasons for it. One is, all of them would like to see the anger level on their own streets be relaxed. They'd like to get this issue off their backs, as it were.

Two is that they basically said to the United States, if you put pressure on the Israelis and Sharon, we'll put pressure on Arafat. I suspect we're going to see more of it. I think we'll see them push our efforts to promote the reform process within bounds.

I mean, bear in mind, they want to see things get controlled here. They want things much more calm. By the same token, "reform" is a kind of loaded term. It could come back and be effected against them as well. So I don't think they're going to get totally carried away with that, but they will certainly support the initial steps that we take to try to move things in a different direction.

SNOW: Saudi Arabia's foreign minister, Saud al-Faisal, has admitted that his government has in fact sent money to the families of homicide bombers. If the Saudis are serious about trying to take action against violence, shouldn't the first action on their part be to close the checkbook?

ROSS: Absolutely.

The thing that you have to do, more than anything else, is discredit the idea of suicide bombing as ever being legitimate. There is no way that people who carry out these kinds of attacks should be treated as martyrs. As long as they're glorified, as long as they're legitimized, you're not going to be able to successfully promote peace or fight terror.

So I think that is one of the first steps that has to be taken.

SNOW: Before the recent spate of suicide bombings, homicide bombings, whatever you want to call them, Yasser Arafat was being dismissed within the region and openly by Israeli Prime Minister Ariel Sharon as irrelevant.

Is violence the key to his relevance?

ROSS: Right now I think the key is that he continues to be the symbol of the Palestinian movement. If you want an address, he's still the address.

One of the critical things about reform is that reform could be used to build institutions, and you don't get rid of Yasser Arafat, but you begin to make his arbitrary use of power much more constrained.

One of the things that has struck me since the time I've been here is how strong the movement for reform is from among Palestinians. There is tremendous ferment. There's also tremendous rivalry: rivalry between the political leaders of Tanzim, who have not been arrested in most of the West Bank cities, who are going right now to try to reestablish themselves, and in a sense seize the high ground within the cities; rivalries between the security services; rivalries between the security people and the Tanzim.

Reform right now could be a useful instrument, especially on our part, to try to begin to change the ground rules in the area and to build a set of institutions that could change the shape of things among the Palestinians.

SNOW: So you believe the reform movement could marginalize Yasser Arafat and at the same time give opportunities to other potential Palestinian leaders?

ROSS: Well, I'd be careful about using the term "marginalize." I do think at this point everybody will point to Arafat and acknowledge him as a symbol of authority. What you're really trying to do, however, is to build a set of institutions.

ROSS: If the Palestinians are going to have a state, and the consensus seems to be, the outcome has to be a Palestinian statehood, one thing the Palestinians have to know is, they're not going achieve that state if that state isn't prepared to be responsible, if it doesn't have the kind of institutions that creates good governance.

There is a tremendous opportunity from that standpoint for the outside world not to look like they're imposing reform, because they can be responding to the impulse for it from the Palestinians, but to make it clear we are not going to re-invest, maybe to the tune of a billion or two billion dollars, in the re-creation of a system of governance that makes no sense, that is characterized by corruption and terror. We will contribute to institutions that create a rule of law.

And if you do that, that will have the effect of containing the arbitrary use of power as Arafat has exercised it.

SNOW: Behind the scenes, what are you hearing from Saudis, Egyptians, Jordanians and others in the region about their view now of Yasser Arafat? Is it changing?

ROSS: There is no question that they are fed up with him. There is no question that they don't believe that his word can ever be counted on. There's no question that they, in effect, are not prepared to have him as a kind of arbiter on what's going to happen in terms of their own societies, whether or not there's anger on the streets or not.

By the same token, I don't see any stomach to be out there and publicly criticizing him. They'll be tough on him in private. I'm not, at this point, seeing any indication they're prepared to cross the line and go public in their criticism in a way that would suggest they embrace the cause of Palestine, but they see him as a threat to its achievement.

SNOW: Finally, you have mentioned the upcoming battle within the Likud Party. Ariel Sharon is going to be facing off against Benjamin Netanyahu over a resolution that would say that there ought to be no Palestinian state west of the Jordan. That is, that the West Bank and Gaza should not be part of the Palestinian state but, in fact, the nation of Jordan should in effect become the Palestinian state.

What would the impact of that resolution be on the peace process and on Ariel Sharon's credibility as leader of Israel?

ROSS: Well, let me take it in terms of Ariel Sharon's credibility as leader. On the one hand, he is certainly more popular than he's been because of the effectiveness of the Israeli military operations. On the other hand, this would send a signal within Israel that at least within Likud, he doesn't call the shots.

Here's a case where most people on the Likud central committee know at the end of the day there's going to be a state. They themselves, when they were polled, even those who opposed it still said by a tune of 83 percent that they expect that to be the outcome.

So this is a political statement designed to embarrass him, and I think it would weaken the prime minister within Israel.

Internationally, it would suggest that, in effect, the party that is the party of power of the prime minister is against what everybody in the international community believes is the necessary outcome. I don't think it would help Israel's position in the world. It certainly would not help the prime minister of Israel. He is obviously against it.

There is an attempt right now to find some compromise formula. I think if you find that, it will serve him well.

SNOW: All right, Dennis Ross, thanks for joining us.