The Palestinian Authority has signed an agreement with the Vatican giving it an official footing in Palestinian areas, and calling for an "equitable solution" to the contentious issue of Jerusalem.

The accord - signed as Palestinian leader Yasser Arafat held talks with Pope John Paul II in Rome - warned Israel that unilateral decisions on Jerusalem were "morally and legally unacceptable".

Israel swiftly reacted by accusing the Vatican of meddling in its peace talks with the Palestinians.

"The agreement ... is an interference in the negotiations between Israel and the Palestinians and we are sorry about this," Israel's Foreign Ministry said in a statement.

It has always maintained that no international mandate is needed because it guarantees the city's special nature as sacred to the three great monotheistic religions.

Aharon Lopez, Israel's envoy to the Vatican, said he was "dismayed" by the agreement.

The accord sets out a framework for dealing with matters such as freedom of religion, human rights and the status of church institutions in Palestinian-ruled areas.

The deal also calls for an international statute for disputed Jerusalem in order to safeguard "the proper identity and sacred character of the city and its universally significant religious and cultural heritage".

Disputed city

There are around 80 important Catholic sites throughout the Holy Land, which incorporates Israel and the Palestinian areas.

One such site in East Jerusalem is the Church of the Holy Sepulchre, one of Christianity's holiest sites.

Palestinians were concerned at a similar deal the Vatican made with Israel in 1997, which placed Catholic institutions in Israel and East Jerusalem under Israeli jurisdiction.

They feared that the Israeli agreement gave implicit recognition to Israel's claim to East Jerusalem, which it annexed in 1967.

Both Israel and the Palestinians believe they should control East Jerusalem.

Israel says the entire city should become its capital, while the Palestinians hope to have East Jerusalem as the capital of a Palestinian state.

Previously, the Vatican has called Israel's annexation of East Jerusalem illegal and said it does not recognise Israeli sovereignty there.

The final status of the city is due to be decided in currently-stalled talks between Israel and the Palestinians.

The agreement comes ahead of a papal trip to the region next month, which will take in Jordan, Israel and the Palestinian territories.