At Yasser Arafat's compound, under Israeli siege for the 10th day, the two sides are bickering about cigarette rations and garbage removal -- but they aren't talking to each other about ending the standoff.

The petty arguments and Arafat's confinement to a few rooms left standing in a pile of debris are emblematic of what has happened to hopes for peace after two years of fighting.

On Saturday, the second anniversary of the Palestinian uprising against Israeli occupation, Arafat addressed a crowd of tens of thousands in Gaza City by telephone hookup during which he shrugged off the siege and promised that "noble Jerusalem will remain the capital of the Palestinian state whether anybody wants it or not."

"We are not only defending our holy places, Christian and Islamic, but every inch of our holy land," Arafat said, his remarks peppered with phrases from Islam's sacred book, the Quran.

The contrast between promise and reality couldn't be sharper.

Arafat, once a world traveler who stayed at the best hotels, now sleeps on the floor of his office, and the about 200 people confined with him bunk in hallways.

Everyone sips frugally from water bottles. Palestinians complain that Israelis have restricted the entry of coffee and cigarettes to a group accustomed to using both in abundance. It appears to be a tactic to make those inside jumpy.

The Israeli military spokesman's office refused to comment on the issue.

The Israelis subject Arafat and his aides to floodlit evenings that make the complex look like a nighttime football stadium. Bulldozers continually growl and shift debris, with the implied threat of knocking down the only two buildings left standing.

Water has been cut off intermittently and those inside are trying to use toilets as little as possible, because of the overpowering stench, said Ahmed Tibi, an Arab member of Israel's parliament who says he speaks with Arafat daily. Garbage piled up before Israeli soldiers allowed its removal.

"It's dreadful. The thing is becoming a health hazard," said Saeb Erakat, a Palestinian Cabinet minister.

Electricity also is cut occasionally, and those inside rely on mobile phones to communicate with the outside.

It's Arafat's third stretch under Israeli siege this year. The latest blockade began after a Sept. 19 suicide bombing in Tel Aviv that killed six people.

While Arafat's rivals claimed responsibility for that attack, Israeli Prime Minister Ariel Sharon charged that Arafat should have been able to halt it. Israeli newspapers report that Cabinet ministers dissuaded him from seizing Arafat and deporting him.

In the assault, troops blasted down much of the complex, which was built as a prison in the 1920s by the British who then controlled the area, and later was used by Israel during its full military occupation of the West Bank and Gaza.

Troops stopped short of rushing in to seize Arafat or his aides -- Sharon said he had promised the United States that Arafat would not be harmed -- but Palestinians say thundering tank fire shook plaster from the ceiling in Arafat's room, briefly causing fear that it would collapse.

Ostensibly, the standoff is over several dozen wanted men Israel says are being sheltered by Arafat. The Palestinians -- and some Israeli commentators -- say the real objective is to make life so miserable for Arafat that he will eventually seek exile.

For now, nothing is moving.

Israel says it will not end the siege -- despite a U.N. Security Council resolution calling for an Israeli withdrawal -- unless all those with Arafat surrender and agree to be questioned.

Israel says anywhere from 19 to about 50 wanted men are inside, but has refused to provide a list. Sharon has said some of those holed up with Arafat are the "biggest terrorists that exist."

Palestinians have said no one will surrender, and have refused to resume negotiations until Israel allows foreign diplomats to meet with Arafat. Israel has refused to ease Arafat's isolation.

In the absence of direct contacts, each side is trying to go through other channels.

Sharon has sent his top aide, Dov Weissglas, to Washington for talks with National Security Adviser Condoleezza Rice.

Erekat says he has been in touch with foreign diplomats, urging them to pressure Israel to comply with the U.N. resolution, which calls for Israel's withdrawal from Palestinian towns.

Foreign Minister Shimon Peres said the resolution also called on the Palestinians to clamp down on terrorism. The two issues "are linked because it is very difficult to leave the territories if we don't know what will come in their place," Peres told Israel Radio.

So the two sides are left bickering over the supplies allowed into Arafat's office. Tibi said an Arafat aide telephones a local Palestinian supplier who gathers everything on the list and takes it to a military base outside Ramallah.

The goods are searched there and some are removed -- coffee, cigarettes, bed sheets, olive oil, olives, apples, sugar and ink.

"Tell me, what is the link between apples and terror? Between ink and terror?" asked Tibi.

Whatever is left is then driven to the compound and again checked before being handed over: 1,000 bread rolls instead of 5,000. Ten boxes of bottled water instead of 100. Rice, one carton of cigarettes, three cartons of underwear in all sizes.

Among those holed up with Arafat is Salam Fayad, a former IMF official who is the newly appointed finance minister, a man more used to boardrooms than bunkers.

"He is as far as you can come from being a terrorist," said U.N. Mideast envoy Terje Roed-Larsen. "He should be now sitting looking at spreadsheets, not into the barrel of a gun. He should be sitting behind a desk, not behind barbed wire."