The Israeli cabinet has agreed in principle to expel Palestinian leader Yasser Arafat from the region.
Arafat insists he is not going into exile
The decision was announced after a cabinet meeting convened to consider a response to suicide bombings that killed 15 people in Israel on Tuesday.
The announcement brought angry responses from Palestinian leaders, as thousands took to the streets in the West Bank and the Gaza Strip.
It is not clear how and when the decision to expel the Palestinian leader will be carried out.
A statement from the cabinet meeting called Mr Arafat an "obstacle to peace" that Israel would remove.
But the cabinet added that it would act in a manner and at a time to be determined later. The army has been asked to draw up a series of options.
The BBC's James Reynolds in Jerusalem says the move may be part of an effort by the Israelis to show Palestinian Prime Minister designate Ahmed Qurei that he should keep his distance from Mr Arafat.
However Mr Qurei said he was abandoning attempts to form a government.
"The Israeli decision (if implemented) would finish off any chance to make peace and create security in the region," he said in a statement.
Thousands gathered outside the Ramallah compound
Mr Qurei - currently the speaker of the Palestinian legislature - has agreed to be Mr Arafat's new prime minister, although he has not yet been sworn in or chosen a cabinet.
Mr Arafat, for his part, responded by reiterating that he was not going into exile.
He was speaking to thousands of supporters who had converged on his battered headquarters in the West Bank town of Ramallah - where he has been confined by Israeli forces since December 2001.
"With our souls and with our blood we will redeem you," they chanted.
The BBC's Richard Miron in Ramallah says the crowd's presence indicates that whatever the Israeli Government might decide in principle, carrying out that task in practice would be very difficult.
Change of heart
A senior adviser to the Palestinian leader warned the Israeli Government not to proceed with its decision to expel him.
It was, the official said, a red line and the Israeli Government was playing with fire.
Another spokesman for Mr Arafat called on the international community to exert pressure to prevent the Israelis from carrying out the expulsion.
Speaking before the Israeli decision was announced, US State Department spokesman Richard Boucher said that while Washington saw Mr Arafat as part of the problem, it would not be helpful to expel him.
Two key Israeli ministers - Foreign Minister Silvan Shalom and Defence Minister Shaul Mofaz - have long argued for the expulsion of Mr Arafat, who they consider to be linked to anti-Israel terrorism.
"Security officials who in the past were opposed to this measure are now in favour. Everyone now supports it," Mr Shalom told public radio ahead of the cabinet meeting.
Up to now, Mr Sharon has rebuffed expulsion calls, fearing international condemnation.