At least two Palestinians collapsed while in custody
Mr Arafat will now be allowed to travel freely through the West Bank and Gaza Strip after a three-month confinement in Ramallah imposed by Israeli forces - much of that time in his headquarters.
And in a further sign of easing diplomatic tension, Israeli Foreign Minister Shimon Peres met a senior Palestinian delegation, reopening a channel of dialogue between the two sides.
But these developments have been overshadowed by fresh violence, which came as dozens of Israeli tanks launched incursions in the northern Gaza Strip and into Ramallah in the West Bank.
At least 17 Palestinians were killed by Israeli fire during the day - including 11 shot in the Jabalya refugee camp in northern Gaza as the army advanced into the camp.
Freed
Fierce clashes are reported in Jabalya and the towns of Beit Hanoun and Beit Lahya.
Israeli Prime Minister Ariel Sharon announced on Sunday that he would lift the blockade on Mr Arafat in return for his arrest of all the suspected assassins of hardline Israeli cabinet minister Rehavam Zeevi.
When he begins to move around Palestinian territories, correspondents said he will see for himself the recent devastation inflicted by Israeli air strikes which have reduced his offices in Gaza, and in Nablus and Jenin in the West Bank, to rubble.
Palestinian reaction
Palestinian Information Minister Yasser Abed Rabbo said the Israeli decision to allow Mr Arafat to move had little significance:
"What is needed from the Israeli Government is to stop immediately its crimes and massacres against the Palestinian people and to end the closure that all the Palestinian people have been living under for more than 18 months," he said.
Israel says Mr Arafat will "need permission" before travelling abroad; Palestinian officials hope he will attend an Arab summit in Beirut later this month, where an emerging Arab peace initiative is expected to be presented
Tens of thousands of right-wing Israelis gathered in Tel Aviv on Monday night to urge their government to step up the military campaign.
The demonstration follows a threat by four right-wing cabinet ministers to leave Mr Sharon's coalition because of what they see as his new softer line on the Palestinians.
'Nazi methods'
About 400 Palestinians were rounded up in the West Bank town of Qalqaliya on Monday, and close to 600 were detained in a refugee camp at Deheishe, near Bethlehem, in a search for militants.
Men aged between 15 and 45 in Deheishe were forced to stand - stripped to the waist and holding their hands to their heads - in a yard on the outskirts of the camp before they were taken away in plastic handcuffs.
Yasser Arafat accused Israeli soldiers of behaving like Nazis in the round-ups.
In an interview broadcast on Abu Dhabi television, he said Israeli soldiers had written numbers on the arms of Palestinians they arrested in a similar operation in Tulkarm last week.
"Is this not one of the methods used by the Nazis against the Jews," Mr Arafat asked. "Is this not a new Nazi racism? Is this acceptable to the international community?"