One source said the security cabinet decided to ask the army to prepare a plan for Arafat's exile from the region but decided against swift expulsion because of US opposition.

A senior Palestinian official denounced Israel's decision, saying exiling Arafat would destabilise the Middle East.

"Harming Arafat or expelling him will destabilise the region and will only bring disaster to the Israeli people," the official said.

The United States also opposed expelling Arafat, but for different reasons, saying it would give him greater publicity.

Foreign Minister Silvan Shalom said before the security cabinet met that Israel should ignore US objections and banish Arafat from the Palestinian territories.

Defiant but trapped

Arafat remained defiant at his badly damaged headquarters in the city of Ramallah, where he has been confined by Israeli army blockades for most of the time since December 2001.

"They can kill me. They have bombs," he told reporters before the cabinet met.

Asked if he would leave, he said: "Definitely not. This is the terra sancta, the Holy land. Be sure the Palestinian people will face this aggression as they did from the beginning."

Egyptian President Hosni Mubarak earlier urged Israel not to opt for exile, saying the veteran leader was crucial for the Middle East peace process.