Yasser Arafat (search) delayed the formation of a new Cabinet on Tuesday by blocking his premier's choice for security chief, a move that will slow efforts to restart peace talks with Israel after a three-month freeze, Palestinian officials said.

Prime Minister Ahmed Qureia (search) has assigned all Cabinet portfolios except interior minister, the officials said. Qureia met with Arafat on Tuesday, but could not resolve the dispute over the post.

Underlying the argument is Arafat's refusal to relinquish control over some of the security services. Qureia's candidate for interior minister, Gen. Nasser Yousef, seeks broad powers.

Qureia's emergency government expires Tuesday, but he said he would present his new Cabinet to parliament by next week.

Waiting in the wings are the Israelis, who established tentative contacts with Palestinian officials in recent days, hoping to arrange a meeting between Qureia and Israeli Prime Minister Ariel Sharon (search) once a Palestinian government has been formed.

The leaders would talk about a possible truce and how to break the deadlock over the U.S.-backed "road map" peace plan for creating a Palestinian state.

In what they described as a gesture to Qureia, Israeli defense officials said soldiers on Wednesday would lift internal closures around all West Bank Palestinian towns except for Jenin and Nablus in the north.

The officials, who spoke on condition of anonymity, said the Defense Ministry would discuss removing illegal settlement outposts in the West Bank. They said it would be a sign Israel was serious about negotiating with Qureia's new government when it is finally formed.

Israeli forces have encircled main Palestinian population centers for two months, a reaction to homicide bombing attacks, banning most travel and further stifling the battered Palestinian economy.

Jamal Shobaki, a minister in the emergency Cabinet, said the interior ministry appointment was the only issue holding up formation of the government. Arafat and Qureia met Tuesday, after a Cabinet session, to discuss it, he said.

"At the end of the meeting, we left both of them ... to solve the problem," Shobaki said. Asked if he thought they could work it out, he said, "I don't think so."

Arafat wants Hakam Balawi, a senior official from his ruling Fatah party, in the post. Qureia insists on appointing Yousef, a general with vast security experience, once an Arafat crony but more recently critical of the veteran leader, Palestinian officials said.

The same dispute contributed to the downfall of the first Palestinian premier, Mahmoud Abbas. He resigned Sept. 6 after just four months in office.

Qureia has said a top priority is working out a cease-fire. He said he would start by bringing Palestinian militant groups like Hamas into agreement, and then bringing in the Israelis.

Israel and the United States refuse to deal with Arafat, who they charge is tainted by terrorism. They insist on dealing with an empowered Palestinian Cabinet that controls Palestinian security forces through its interior minister.

Before leaving Moscow Tuesday night, Sharon further clarified his position about Arafat. "If the Palestinians want to keep Arafat as a symbol -- though I don't know what specifically he embodies -- it's the business of the Palestinians. As for his political influence, Arafat must not have such influence," Sharon said.

An official traveling with Sharon said Monday that if Qureia forms a government, a meeting between the two men could take place "within a very short time."

Israel insists that the new Palestinian government confront militant groups, something Qureia has said he will not do, preferring to negotiate an end to violence. The "road map" plan requires the Palestinians to dismantle violent groups.

But Sharon reversed his policy last week, scrapping a demand for a crackdown on Palestinian militants as a condition for talks.

Domestic displeasure over Sharon's inability to end the violence may have been a factor in the switch. Sharon also faces pressure within his own government.

Shinui, a moderate party in the coalition Cabinet, said Tuesday it will propose a peace plan that includes dismantling the Netzarim settlement in Gaza and halting targeted killings of Palestinian militants.

A call from within the government to remove a settlement would mark an unprecedented challenge to Sharon, a strong supporter of Jewish settlements in the West Bank and Gaza.

Palestinian gunmen recently attacked Netzarim, isolated deep in Gaza, killing three Israeli soldiers.

Meanwhile, a survey released Tuesday showed Palestinians pessimistic about peace prospects, while many supported homicide bombing attacks and operations inside Israel as well as in the West Bank and Gaza Strip.

The poll, by the Palestinian JMCC media group, found that 72 percent were pessimistic about the prospects of a peaceful solution to the Israel-Arab conflict. In response to other questions, 68 percent favored new attacks against Israelis, 62 percent supported homicide bomb attacks and 57 percent opposed a halt to attacks inside Israel.

The survey had a margin of error of three percentage points.