Mr Sharon compared Mr Arafat to Mr Bin Laden
Mr Peres had been due to meet Mr Arafat on Sunday after weeks of preparations, but the prime minister cancelled the meeting on the grounds that it could damage Israeli interests.
US President George Bush has telephoned Mr Sharon to stress that Washington wanted the talks to go ahead soon amid efforts to build a broad coalition - including Arab countries - to combat the terrorists who attacked the US on Tuesday.
The sources said Israeli forces were near the Voice of Palestine radio and TV buildings at 0445 (0145 GMT). The army refused to confirm or deny the reports
Two Palestinians were also shot dead overnight at Khan Younis in the Gaza Strip during a clash with Israeli forces, hospital sources said.
Three other Palestinians were reportedly injured, but it is not clear whether the dead men were gunmen, or civilians living nearby.
Elsewhere in Gaza, seven Palestinians were injured in clashes with Israeli troops backed by tanks at Beit Hanoun, it was reported.
Palestinians have voiced fears that the Israeli Government would use events in the US to justify using increased violence to quell the Palestinian uprising, or intifada.
Meeting 'inappropriate'
A senior Israeli official told the French news agency AFP that the reason for Mr Sharon's decision to prevent a top-level Israeli-Palestinian meeting was "Arafat's behaviour in the past and his behaviour right now".
He said such a meeting would be "inappropriate".
The Palestinians reacted by accusing Prime Minister Sharon of seeking war, and have accused Israel of using events in the US as an excuse to step up attacks against them.
"We were prepared to hold the meeting on Sunday," said Information Minister Yasser Abed Rabbo.
Coalition
Mr Peres said talks with Mr Arafat were necessary if the US was to build up an anti-terror coalition after Tuesday's terrorist attacks.
He also rejected Mr Sharon's comparisons of the Palestinian leader to Saudi terror suspect Osama Bin Laden.
Mr Peres stressed that the US Secretary of State, Colin Powell, who had been pressing for the talks, "attaches great importance to the holding of the meeting."
Mr Powell himself said after the cancellation that it was important for peace that the two sides meet:
"We believe a meeting is important to get the process started," he said in Washington.