Arafat was defiant, vowing that Israel would have to kill him to get rid of him. "They can kill me with their grenades and bombs, but I will not leave Ramallah," he said.
The 74-year-old Palestinian leader emerged from his sandbagged office building and flashed a victory sign to hundreds of supporters who had rushed to his headquarters to protect him from what they feared would be an immediate Israeli move to seize him.
"The leader is Abu Ammar," the crowd chanted, referring to Arafat by his nom de guerre.
Using a bullhorn, Arafat recited a passage from the Quran, the Muslim holy book, about standing up to oppression. Then, waving his finger rhythmically, he led the crowd in a chant: "To Jerusalem, to Jerusalem, to Jerusalem."
Palestinians took to the streets across the West Bank and the Gaza Strip to protest Israel's decision. In Gaza City, hundreds of gunmen — some firing into the air — rushed to the parliament building. Marchers carried Arafat posters and flags, chanting: "Sharon, listen well, we will send you to hell!"
The incoming Palestinian Prime Minister, Ahmed Qureia (search), also declared his support for Arafat, saying he would aside plans to form a new government over Israel's decision, according to Reuters news service.
If Arafat is expelled, Qureia said it "will eliminate any possibility for peace in the area and will eliminate any possibility to achieve security and also eliminate any possibility for me to form a Palestinian government."
An Israeli government statement issued after a meeting of Prime Minister Ariel Sharon (search) with his security Cabinet said "recent days' events have proven again that Yasser Arafat is a complete obstacle to any process of reconciliation."
"Israel will act to remove this obstacle in the manner, at the time, and in the ways that will be decided on separately," the statement said.
Israeli officials said on condition of anonymity it was a decision in principle and that how and when Israel acts will depend on many factors, including the international response.
The decision was an apparent effort to balance growing public and political pressure for a dramatic move with a desire to avoid a confrontation with the United States, which opposes expulsion.
At the State Department, spokesman Richard Boucher again said the Bush administration was opposed to expelling Arafat.
"Our view of Mr. Arafat hasn't changed," Boucher said. "Our view is that he is part of the problem, not part of the solution."
However, the spokesman said, "we think it would not be helpful to expel him because it would just give him another stage to play on."
Aware of the debate over his fate, Arafat said Thursday, before the Cabinet announcement, that he would never leave voluntarily and fully expected to be killed. "This is my homeland," he told reporters at his Ramallah headquarters, where he has been confined by Israeli sieges and threats for nearly two years. "No one can kick me out."
Ambassador Marc Ginsberg, Fox News foreign analyst, said he doubts Arafat will be removed any time soon.
"He remains the 1,800 pound gorilla that we can’t live without and we can’t live with," Ginsberg said. "It is very possible that he [Arafat] has entered into some sort of commitment with his supporters to make sure he wasn't taken out of that complex alive. The last thing we need right now is to have Arafat martyr himself."
Arafat aide Nabil Abu Rdeneh said, "The Israelis are playing with fire, this fire will reflect negatively on everybody."
Abu Rdeneh said Arafat himself "does not care what the Israelis are saying — he only cares about his people." He also said Israeli leaders had "ruined the road map" and "they should come back to the negotiating table without conditions."
The Israeli statement also said Sharon ordered the army "to act ceaselessly" in a series of strikes against members of Islamic militant groups.
"Israel will negotiate only with a prime minister who will act immediately to dismantle and destroy the terrorist organizations," the government said in the statement, adding that it rejects the Palestinian proposal of a new cease-fire.
The security Cabinet also decided to speed up construction of a security fence through the West Bank.
The open-ended decision gives Qureia some time to take steps to cool the violence that has swept the region in recent weeks.
But Qureia said if Israel expels Arafat, it "will have grave consequences, not just on the Palestinian areas, but on the entire region."
"We call upon all wise people in the world to stop this crazy decision," he said.
Palestinian national security adviser Jibril Rajoub, an Arafat loyalist, said expelling the leader will only threaten stability.
"This foolish action will bring tragedy upon the Israelis. I warn against such a foolish action," he said.
The Israeli military had begun making preparations for Arafat's possible expulsion in the near future and was waiting for a security Cabinet decision, a security official said on condition of anonymity.
Israeli troops earlier Thursday set up positions on two tall buildings overlooking Arafat's headquarters, and F-16 warplanes repeatedly flew overhead.
Israeli Foreign Minister Silvan Shalom said earlier a majority in the security Cabinet favored expulsion but did not give a breakdown. Sharon might not put the idea to a vote because the United States was not expected to approve it.
Sharon has vetoed the idea before because of Washington's disapproval.
"We are in a situation in which (U.S.) approval for this, in case we asked for it, would be almost impossible to obtain," Shalom told Israel Army Radio. "I think there are some situations in which we have to make decisions ... that are completely cut off from outside influence."
Israeli Defense Minister Shaul Mofaz was quoted as telling two people in his inner circle that expelling Arafat was the least Israel should do, and that killing the Palestinian leader should be considered.
The Yediot Ahronot newspaper did not provide quotations from Mofaz. The idea of killing Arafat was not on the security Cabinet's agenda, a security official said on condition of anonymity.
Former Prime Minister Shimon Peres, head of the moderate opposition Labor Party, said Thursday expelling Arafat would be a "great mistake."
"Occasionally you have to live with problems without solving them," Peres said in Washington.
The Israeli security Cabinet also weighed other options, including tightening Arafat's isolation by keeping away visitors and cutting phone lines. In previous sieges, Israel briefly cut Arafat off from the outside world, but restored phones, water and electricity under international pressure.
Arafat said Thursday he remained committed to the U.S.-backed "road map" peace plan and asked the international community to "quickly, quickly move to protect the peace."
After Arafat retreated into his office blowing kisses, supporters handed out leaflets warning of "catastrophic" consequences if Israel expels him.
Palestinian negotiator Saeb Erekat, who is close to Arafat, warned that deporting the veteran leader would empower extremists. "If this decision is carried out, I don't know when the next Palestinian would even be able to say the word peace," Erekat said.
At the White House, press secretary Scott McClellan said "the focus needs to be on is creating the conditions necessary for peace to prevail. And all parties need to keep in mind the responsibilities to get to that point."
In a first response to the bombings, Israel stepped up its campaign against Hamas, dropping a half-ton bomb on the home of senior Hamas official Mahmoud Zahar on Wednesday. Zahar survived, but his eldest son and a bodyguard were killed.
Hamas' military wing threatened to widen its bombing campaign and target Israeli homes and high-rises. Israeli security forces were on high alert Thursday, and police checkpoints caused massive traffic jams.
In the West Bank, Qureia decided Thursday to form a full government, rather than the emergency Cabinet of eight ministers he had initially envisioned. That meant the formation of the government would take more time than expected.
The Palestinian leadership also decided to form a national security council, headed by Arafat, to oversee all branches of the security forces. The council would technically satisfy a demand by Israel and the United States that control over security be under one authority. However, Israeli government spokesman Zalman Shoval said the step meant nothing as long as Arafat was involved in security decisions.
Qureia, selected by Arafat to replace Prime Minister Mahmoud Abbas, initially wavered on whether to take the job, insisting he first get U.S. guarantees that Israel would meet its obligations in the road map plan, which envisions a Palestinian state by 2005.
In the wake of Tuesday's Hamas bombings, however, Qureia was urged by U.S. officials to move quickly to form a Cabinet, Palestinian sources said. Qureia was given to understand that the Palestinians would be in a better position to forestall major Israeli reprisals if they quickly replaced Abbas, who resigned Saturday after four months of wrangling over control of the security forces.
In Ramallah, witnesses reported Israeli troop movements. Israel is in control of the West Bank Palestinian town and has trapped Arafat in his office building there for more than a year.
Israeli forces blew up two houses of suspected militants early Thursday — one in Ramallah, south of Arafat's compound, and the other in the suburb of Beitunia.
Sharon returned from a trip to India before dawn Thursday, cutting short his historic visit by a day. An official on Sharon's plane, briefing reporters on condition of anonymity, blamed Arafat for the bombings.
Fox News' Jennifer Griffin and The Associated Press contributed to this report.