Palestinian leader Yasser Arafat is preventing his prime minister from carrying out a key financial reform, and the dispute is threatening to hold up much-needed foreign aid, Cabinet ministers said Tuesday.

Prime Minister Ahmed Qureia (search) denied reports that he threatened to resign over the row. However, similar disputes with Arafat pushed Qureia's predecessor, Mahmoud Abbas (search), to quit last fall.

In another development, an Israeli parliamentary committee approved more than $20 million in new funding for Jewish settlements (search) in the West Bank and Gaza Strip, legislators said Tuesday.

The transfer of funds came despite Prime Minister Ariel Sharon's recent proposals to withdraw from some of these areas as part of a unilateral "disengagement" from the Palestinians.

The decision outraged the Palestinians as well as opposition legislators. It also threatened to complicate a visit this week by senior U.S. diplomats, who are to arrive Wednesday to talk about Sharon's proposals, including the removal of up to 17 of Gaza's 21 settlements.

The argument between Arafat and Qureia broke out after the Palestinian Cabinet decided Saturday to pay members of the security forces through deposits to their bank accounts, Cabinet ministers said.

Currently, security officers are given lump sums of cash and then distribute the money to their employees — an invitation to corruption.

Qureia needed the Cabinet decision ahead of a trip to European capitals this week, ministers said on condition of anonymity. Qureia knew European leaders would ask him about the issue and might condition further aid on the reform, they said.

The Palestinian Authority relies on foreign assistance for about 60 percent of its annual budget. Most of that aid comes from the European Union.

After Saturday's Cabinet meeting, Qureia and Arafat had a heated argument over the direct-deposit issue and Arafat refused to implement the Cabinet decision, said the ministers.

Arafat was especially adamant about blocking salary transfers to 30,000 national security personnel who are under his direct authority, the ministers said.

"There were tough discussions about the issue of security, but neither Abu Ala [Qureia] nor any other minister talked about resignation,"said Cabinet minister Jamal Shobaki.

Meanwhile, the Israeli parliament's Finance Committee voted Monday to allocate $22 million for housing projects, which lawmakers said would be almost entirely in the West Bank and Gaza. Committee approval is the last major step needed to send the funds.

The money had originally been allocated for housing assistance for young couples and low-income families inside Israel, the Haaretz daily reported.

Yuval Steinitz, a lawmaker from Sharon's Likud Party, told Israel Radio that in light of the possible dismantling of some settlements, "it is our obligation and our right to care for the settlements that exist under difficult circumstances."

Palestinian officials said the decision undermines the U.S.-backed "road map" peace plan. The plan, which aims for an independent Palestinian state alongside Israel by next year, has been stalled for months.

"At a time when they speak about withdrawing settlements from Gaza, they allocate millions of dollars for settlements throughout the West Bank and Gaza," said Saeb Erekat, the chief Palestinian peace negotiator.

Opposition lawmakers also protested the transfer.

"On one hand, the prime minister of Israel is talking about dismantling, uprooting settlements unilaterally ... On the other hand, the government is enriching the settlements," said Yossi Sarid of the dovish Meretz Party. "

Sharon's office declined comment.

While the United States formally remains committed to the road map, American officials have indicated that they could support Sharon's disengagement plan. Three senior U.S. envoys are due in Israel on Wednesday to discuss Sharon's new plan.

Although Sharon hasn't carried out any of his unilateral steps, talk of abandoning settlements has alarmed Sharon's hawkish coalition partners who have come up with their own plans.

On Tuesday, Deputy Education Minister Zvi Hendel of the National Union party proposed a territorial exchange that would hand Israeli Arab towns to Palestinian control, while Israel would control settlements in the West Bank and Gaza.

Earlier this week, National Union leader Avigdor Lieberman sent letters to 10 hawkish ministers calling on them to devise an alternative to Sharon's plan. Lieberman proposed confining the Palestinians to four isolated enclaves in the West Bank.

Coming from a small, hawkish party, the new plans have little chance of success. But they reflect the growing opposition that Sharon faces within his government.

In the Gaza Strip, meanwhile, some 1,500 angry Palestinians early Tuesday shut down the crossing point Gaza residents use to reach jobs in Israel. The laborers were protesting new security restrictions and Monday's death of a fellow worker they blame on Israel. Israel said the 41-year-old man had died of a heart attack.

Also in Gaza, hospital officials said a 24-year-old Palestinian had died from wounds sustained in an explosion last Wednesday at his home in the Khan Younis refugee camp. Residents said he had been wounded while preparing explosives.