Defiant Palestinian legislators forced the resignation of Yasser Arafat's 21-member Cabinet Wednesday, delivering the biggest political blow to the Palestinian leader since he returned from exile eight years ago and underscoring the mounting discontent among ordinary Palestinians.

Lawmakers clapped and shared jubilant smiles as the resignations were announced moments before parliament appeared set to vote no-confidence in Arafat's ministers. He now has two weeks to present a new Cabinet to parliament.

Earlier in the day, Arafat set Jan. 20 as a date for presidential and parliamentary elections, making the announcement as part of a failed deal to save his Cabinet. The setting of the specific date is likely to displease the United States, which had sought a delay in presidential elections to gain time to find ways of sidelining Arafat.

The parliamentary challenge move did not immediately endanger Arafat's leadership or appear to be organized by any individual challenger. However, it was a blow to his prestige and reflected a groundswell of anger among a Palestinian public tired of years of corruption and mismanagement

Salah Taameri, a member of Arafat's Fatah movement who has known the Palestinian leader for 36 years, said he had never before opposed Arafat but joined the wave of discontent "so he knows how serious we are."

"There is a crisis of confidence," he said.

At the same time, no one at the session called on Arafat himself to step down -- even though the United States and Israel have made clear that after two years of Mideast violence, they no longer consider him a partner for peacemaking. Critics tended to blame Arafat's aides, and not the longtime leader himself.

"I hope President Arafat ... will wake up and start to understand that the people around him are not satisfying the Palestinians' needs," said lawmaker Jibril Rajoub, recently fired by Arafat from his position as West Bank security chief. "I hope he will learn a lesson from what happened today, which represents the disappointment in which Palestinians are living for two years."

In a June Cabinet reshuffle, Arafat added five new ministers. But legislators complained the changes were largely cosmetic and that ministers considered incompetent or corrupt had stayed on.

Tuesday's drama began when Arafat summoned Fatah legislators, who dominate the 88-seat parliament, to his office to try to persuade them to back the Cabinet. The legislators stood their ground.

Palestinian officials, speaking on condition of anonymity, said that according to a compromise floated in the meeting, Arafat would set an election date -- rendering the Cabinet temporary -- and parliament would hold a vote only on the five new ministers appointed in June, who are seen as honest and hard-working.

Arafat, apparently fearing defeat, accepted the deal, the officials said.

But parliament's legal committee then decided that the entire Cabinet must be presented for approval, not only the five new ministers. Observers said legislators apparently didn't believe Arafat was sincere in setting a date for an election and feared he might revoke the decree later.

Just before the vote was to begin, Cabinet ministers submitted their resignations to Arafat, who accepted them.

Mohammed Hourani, a lawmaker who opposed Arafat, estimated that 57 lawmakers were poised to vote against him, out of the 65 legislators attending either in Ramallah or by video conference from Gaza.

"He [Arafat] is our leader, but we are his partners, and we will criticize him when he does things we think are not suitable," Hourani said.

President Bush has called for a new Palestinian leadership, and Washington had been seeking to delay elections, presuming that an early date would mean an easy re-election for Arafat.

After Arafat announced the Jan. 20 date, a U.S. official suggested that was too soon. "We think the ground has to be prepared before that [elections]," said Paul Patin, U.S. Embassy spokesman in Tel Aviv.

While many Palestinians find fault with Arafat, they say they resent U.S. efforts to try to push him aside and chafe at meddling in their affairs.

One proposal supported by some Palestinians has been appointing a prime minister who would run day-to-day government, while Arafat would be gradually turned into a figurehead. While Arafat earlier appeared to consider the idea of a prime minister, in recent days he has blocked all such efforts.

None of the central figures in the Palestinian leadership have said they would run against Arafat. One key figure -- militia leader Marwan Barghouti -- is in an Israeli prison, and another, parliament speaker Ahmed Qureia -- did not play a major role in Wednesday's parliamentary challenge.

Reuven Rivlin, an Israeli Cabinet minister, said the Palestinians must know that if they re-elect Arafat, "we will continue to treat them as a people led by a terrorist."

Other Israeli leaders said the Cabinet's resignation and pressure from the Palestinian Legislative Council -- the parliament -- were signs of Arafat's waning influence.

"Until now, we had been accustomed to a reality in which without Arafat, nothing could happen," said Israeli Defense Minister Binyamin Ben-Eliezer. "It could be that we're at the beginning of some kind of change."

In other developments, Israeli troops entered a Gaza City neighborhood early Thursday and surrounded the house of a Hamas militant, apparently intending to destroy it, residents said. Israeli military sources, speaking on condition of anonymity, said a limited operation was underway in Gaza.

The move came a day after Israeli troops backed by about 60 armored vehicles the nearby town of Beit Hanoun, searching mosques and homes for suspected Islamic militants and exchanging fire with Palestinians.

Also Wednesday, three Palestinians were killed Wednesday by fellow Palestinians, charging that the three were collaborators with Israeli intelligence, Palestinian security officials said.