Israel would allow the Palestinian parliament to convene a special session to set a date for elections and discuss political reforms, the government said Tuesday.

Another official statement, however, harshly criticized the Palestinian leadership.

The conflicting statements reflected the divisions in Israel's center-right government, and came as the Palestinians discussed new U.S. demands for reforms that would sideline Palestinian leader Yasser Arafat.

The Palestinians have tentatively set parliamentary and presidential elections for January, and the Palestinian Cabinet had said it would ask for the special session.

A session requires Israeli permission because of travel restrictions imposed on the Palestinians during the current violence between the two sides.

In a statement, the Israeli Foreign Ministry said that in talks with Foreign Minister Shimon Peres, Palestinians had raised the issue of convening their parliament, and "Israel would respond favorably to such a request once it is put forward."

Palestinian general elections were held in January 1996 as part of interim peace accords. At the time, Palestinian residents of east Jerusalem, the sector Israel captured in the 1967 Mideast war and annexed a few weeks later, also participated in the vote.

Israel's government, headed by Prime Minister Ariel Sharon, opposes the participation of east Jerusalem residents in Palestinian elections, arguing that such a step would undermine Israel's claims to sovereignty over all of the city.

In a statement from his office relating to reports that the parliament would approve the new Cabinet appointed by Arafat in June, said "no Cabinet appointed or run by Arafat is acceptable to Israel." The statement also demanded reforms in fighting terror and corruption.

If they hold elections, the Palestinians will face new requirements from the United States. The Palestinian leadership heard details Tuesday of one new U.S. demand -- separating the elections for parliament and president, apparently as a way of sidelining Arafat.

The United States wants the Palestinians to hold parliamentary elections first, have parliament choose a prime minister and only then prepare for a presidential vote, a senior Palestinian official said on condition of anonymity.

U.S. officials envision a prime minister as a counterweight to Arafat. The current Palestinian government does not have a prime minister.

The demands were delivered earlier this week, at a meeting in Paris of an international task force that is overseeing Palestinian reform efforts.

The Palestinian envoys attending the Paris conference briefed the Palestinian Cabinet on U.S. and European demands Tuesday.

Palestinian Labor Minister Ghassan Khatib, who also attended the Paris meeting, said European officials favored delaying elections until reforms in the Palestinian security services are complete. The European delegates are not satisfied with reforms so far and want more than personnel changes, Khatib said.

Palestinian officials have said they oppose any changes in their electoral system. "We made it clear to the Europeans and the Americans that the election of our coming president and of a prime minister -- should there be one -- is an internal Palestinian issue," Khatib said.

The Palestinians want to set up a state in the West Bank and Gaza Strip with the Arab section of Jerusalem as its capital. But talks now are over a much more limited plan -- easing tension and ending nearly two years of violence.

Violence continued Tuesday evening. A mortar shell fired by Palestinians hit a house in a Jewish settlement in Gaza, causing damage but no injuries, the military said.

An hour later, Israeli tanks moved into Palestinian-controlled territory near the settlement of Netzarim, near Gaza City, and blocked a main road, Palestinians said.

Israeli Defense Minister Binyamin Ben-Eliezer was to meet Wednesday with his Palestinian counterpart, Interior Minister Abdel Razak Yehiyeh, to discuss implementing a handover of the Gaza Strip to Palestinian security, while Israel pulls its troops back from forward positions there, Palestinian officials said.

The Israeli Defense Ministry would say only that a meeting would take place in the coming days.

On Aug. 18, Ben-Eliezer and Yehiyeh announced an agreement to use Gaza and the West Bank town of Bethlehem as test cases: If Palestinians could prevent terror attacks originating there, Israel would ease restrictions in other parts of the West Bank.