Refusing to buckle under U.S. pressure, Palestinian leader Yasser Arafat said Friday he won't step down. But in an interview at his wrecked Ramallah offices, he said he had not yet decided whether to run in January elections.

"This has to be decided in our senior leadership," Arafat told The Associated Press and Bahrain television. "It is not only up to me. It will be up to many people."

Arafat insisted it would be cowardly to leave office.

"I have been elected by the people. I am not a coward. I'm not ready to betray the people who elected me," Arafat said, after sharing a meal of rice, kidney beans, toasted pine nuts and watermelon in his sparse office. Much of his compound has been destroyed under Israeli fire.

He refused to give more specifics, repeating only that he didn't intend to bow out. The Palestinian leader is often vague in interviews and avoids being drawn into politically delicate subjects.

He responded to questions about his future amid reports in the Israeli media predicting his imminent downfall, and following calls by President Bush for the Palestinians to choose a new leadership "not compromised by terror."

Secretary of State Colin Powell, meanwhile, said Friday that the U.S. administration won't deal with Arafat and was waiting for an alternative leadership to emerge.

Powell told the Qatari satellite channel Al-Jazeera that the Bush administration had received an "interesting" letter from Arafat detailing the Palestinian reforms under way. He did not elaborate.

Palestinian officials did not immediately comment on the letter or its contents.

Powell also defended the Israeli army presence in Palestinian areas, saying Israel did not want to reoccupy the lands but just put a damper on terrorism. Israeli troops currently control seven Palestinian towns in the West Bank.

Condoleezza Rice, the U.S. national security adviser, told Israel's Channel Two the United States had decided a change of the entire Palestinian political system was necessary because the Palestinian Authority hadn't done enough to fight terror.

"This is not about Chairman Arafat, this is a political system that needs to change so that you can have accountability in institutions, financial transparency and accountability, security services that are accountable," she said. "Never again should one man hold sway over the lives of the entire Palestinian population."

Since Bush made the demand, many Palestinians appear to have rallied around their leader, despite economic hardships and long-standing complaints of corruption in the Palestinian Authority.

Arafat said if he was voted out, he would respect the decision. To date, however, no serious challenger has emerged.

In Cairo, Egyptian President Hosni Mubarak warned Israel that replacing Arafat could create "chaos" and cause more violence in Palestinian territories. He demanded that a "mechanism" be found to implement Bush's Mideast peace plan.

Mubarak also said Arafat may step down after a settlement is reached, adding in the interview published Friday in Cairo's daily Al-Ahram that the Palestinian leader "will not be able to stay in office any longer after completing his tasks and struggle." He did not elaborate.

Also Friday, Israel Army Radio reported that negotiations were under way over the fate of Marwan Barghouti, a key leader in the West Bank of Arafat's Fatah movement. The radio said Barghouti would be expelled to Lebanon under a deal taking shape between Israel and Hezbollah guerrillas.

Israel would send Barghouti through Lebanon to exile in Europe, release about 100 prisoners and return the bodies of dozens of Hezbollah guerrillas, the report said. In exchange, Hezbollah would free Elhanan Tennenbaum, an Israeli abducted in October 2000, and return the bodies of three soldiers abducted from the Israel-Lebanon border.

Israel said Thursday that Barghouti would be tried in a civilian court for allegedly directing attacks against Israelis by a Fatah-affiliated militia. Barghouti has insisted he is not involved in violence.

Lawyer Jawad Boulos said his client had not been approached about any deal, but said "if Barghouti's name is included ... this would not be a surprise and would not be rejected out of hand."

The report said the negotiations were being handled by the German government, and to a lesser extent, the United States.

Israeli Defense Ministry spokeswoman Rachel Niedak-Ashkenazi refused to comment on the report.

Hezbollah leader Sheik Hassan Nasrallah confirmed "serious" contacts are in progress. "I can say that some progress has been made," he said on Hezbollah's station, Al-Manar TV.

Barghouti, 43, was captured in a raid near Ramallah on April 15. He has not been charged.

In renewed violence, two Palestinians were killed Friday and three wounded, two critically, in a clash in Gaza, Palestinians said. The Israeli military said soldiers arrested a terror suspect, exchanging fire with Palestinians during the operation.

In Jenin, a free-lance Palestinian photographer, Imad Abu Zahra, 35, died Friday, a day after being shot in the leg.

A fellow photographer said an Israeli tank's machine gun fired the fatal shot. Israel's military said the tank gunner was responding to rifle fire from Palestinians and it was possible Palestinian fire killed the photographer.

Israeli forces remain in control of Jenin and six other Palestinian towns and cities in the West Bank. The Israelis moved in June 20 after back-to-back suicide bombings killed 26 people in Jerusalem.

In another development, high-level talks between Israeli and Palestinians were to resume Saturday night, Arafat said. However, there was no confirmation from Israeli officials, and late Friday Israel's Channel One television said the meeting was in doubt.

Upbeat about the renewed contact, Arafat said more progress could be made if Prime Minister Ariel Sharon "will give them the mandate" but criticized what he called a "military escalation" in the West Bank.

Arafat's political weakness is apparent: Palestinians gave him an approval rating of only 35 percent in May and his control of militants or even his own lieutenants is questionable. Yet despite accusations that his Palestinian Authority is ineffectual and corrupt, Arafat is still revered by many as a guerrilla hero who kept the Palestinian cause on the world's agenda for four decades.

Asked what had occupied his dreams during his ongoing isolation, Arafat said: "To be one of our martyrs and ... to have one of our small children raise the flag of Palestine."