HIGHLIGHTS: Outcry Resounds Throughout Arab & Islamic Capitals around the World||Arafat Wins Temporary Reprieve from FATAH over Announcing New Cabinet & Appointing a Premier||Israel Arrests Pro-Iraqi Palestinian Chief & Brushes Blair's Call for Talks Before Year-end||Despite On-going Israeli Repression, Intifadha Clashes Rage on Unabated Across the Occupied Territories|| STORY: Palestinian President Yasser Arafat led a chorus of Muslim condemnation on Wednesday against U.S. legislation that lends support to Israel's disputed claim to Jerusalem as its capital.

"This decision is a catastrophe that Muslims and Christians should not let pass in silence," Arafat said about the law that took effect on Monday and requires the U.S. government to list the holy city as the Israeli capital in official documents.

"I am asking the American administration and the American president to stop this," Arafat said in his compound in the West Bank city of Ramallah, scene of a 10-day Israeli siege that ended on Sunday under pressure from the United States.

In Gaza, more than a thousand Palestinians marched to protest against the U.S. law on Jerusalem, calling for Bush to be thrown into the "dustbin of history" and burning U.S. and Israeli flags.

The U.S. law also drew sharp criticism from the Arab League and key U.S. ally Saudi Arabia at a time when Washington faces an uphill struggle to convince Arab states to back possible U.S. military action against Iraq.

Iran warned it would trigger a wave of Muslim hatred against the United States, and Lebanon's Hizbollah resistance group said it exposed Washington's bias in favor of the Jewish state.

Palestinians want East Jerusalem, captured by Israel in the 1967 Middle East war, as capital of a future state in the West Bank and Gaza. Israel regards all of Jerusalem as its capital, a claim not recognized internationally.

The controversy over Jerusalem, a city sacred to Muslims, Christians and Jews, was another reminder of the thorny issues that divide Israelis and Palestinians as they remain locked in conflict after two years of violence.

In Cairo, Egyptian President Hosni Mubarak, a critic of Prime Minister Ariel Sharon's military clampdown on the Palestinians, used events marking the anniversary of the 1973 war against Israel to drive home his message.

"I warn the Israeli government of the danger of its policies for the future of the Middle East," he said in a speech. "The United States should stop what Israel is doing."

ARAFAT WINS TEMPORARY REPRIEVE FROM FATAH OVER ANNOUNCEMENT OF NEW CABINET & PRIME MINISTER APPOINTMENT

While Palestinians and their Arab brethren seethed over the U.S. law on Jerusalem, Arafat appeared to have won a temporary reprieve from U.S.-backed reforms demanded by his parliament.

Arafat on Tuesday received the backing of his influential Fatah faction for a three-week delay in appointing an interim cabinet and support for his opposition to the idea of naming a prime minister to assume some of his powers.

Arafat, whose 21-member cabinet quit in September to avoid a showdown with lawmakers when it appeared he would lose a vote of confidence in the reform-minded Palestinian Legislative Council, was to have appointed new ministers by the end of last month.

The United States, the main Middle East peace broker, has demanded the Palestinians choose new leaders "not compromised by terror" before talks on statehood can resume.

Arafat, who has denied Israeli accusations he has helped orchestrate anti-Israeli violence in the Palestinian uprising for independence, has scheduled presidential and parliamentary elections for January 20.

Fatah officials said the faction, which traditionally backs Arafat, was against an immediate appointment of a prime minister because it would play into Israeli attempts to weaken him.

Israel's abortive siege has rallied public support for Arafat, whose popularity had been sagging before tanks stormed into his compound following Palestinian suicide bombings.

ISRAEL ARRESTS PRO-IRAQI PALESTINIAN CHIEF, BRUSHES BLAIR TALKS CALL

Israel has meanwhile arrested the leader of a pro-Iraqi Palestinian group and brushed off a British call for renewed talks before year's end on the creation of a Palestinian state.

The occupation army arrested Rakat Salem, secretary general of the Arab Liberation Front, which distributes Iraqi money to relatives of resistance bombers, during a raid on his offices in the West Bank town of Ramallah, the group said.

Israelis like Foreign Minister Shimon Peres and minister without portfolio Dan Meridor gave a cool response to British Prime Minister Tony Blair's call to resume peace talks with the Palestinians before the end of 2002.

Peres said Blair's speech was aimed at calming critics of his Iraq policy at home and Meridor said it overlooked key Israeli concerns, such as to ensure secure borders before it withdraws from the occupied Palestinian territories.

But they avoided direct criticism of Blair, who, like Israeli leaders, backs the tough US line against Iraq.

Palestinians in contrast welcomed Blair's call as "a very important statement."

The prime minister's proposal set the goal of "an Israeli state free from terror, recognised by the Arab world, and a viable Palestinian state based on the boundaries of 1967".

But the Palestinians said Blair must push Israel to implement last week's UN Security Council resolution, which not only called for an end to Israel's siege of Arafat's Ramallah headquarters but also for a withdrawal from reoccupied Palestinian cities.

Resolution 1435 also called on the Palestinians to arrest members of Resistance groups, something they have failed to do, arguing that Israel's more than three-month reoccupation of the West Bank and frequent raids have crippled their security services.

INTIFADHA CLASHES CONTINUE TO RAGE ON

Meanwhile, intifadha, uprising, clashes continued in the West Bank, where nine stone-throwing Palestinian demonstrators were wounded by Israeli troops late Tuesday near the northern town of Jenin, Palestinian officials said.

On Wednesday, Israeli forces near Jenin also destroyed the house of an Islamic Jihad resistance activist arrested six months ago.

At the same time, Israeli occupation forces arrested six Palestinians in the West Bank, four of them on their so-called wanted list.

And in the northern Israeli town of Afula, a bomb squad defused an explosive device hidden in a bag that had been placed next to two gasoline pumps at a service station.

PHOTO CAPTION

Palestinian leader Yasser Arafat flashes the victory sign to a group of supporters gathered outside his office in Ramallah, on the West Bank, Wednesday Oct. 2 2002. (AP Photo/Muhammed Muheisen)
- Oct 02 11:04 AM ET