The Palestinian leadership has accused Israel of making up pretexts to keep up attacks on Mr Yasser Arafat.
The claims follow the interception of a ship Israel claims contained arms destined for use by fighters pursuing their
intifada
against Israeli occupation of Palestinian territories.
"The Palestinian Authority is a major player in the networks of world terrorism. They are headed by Iran and aimed at sowing death and destruction throughout the entire world," Israeli Prime Minister Mr Ariel Sharon said.
He was speaking from where the Karine A, the ship containing the arms, was docked after being seized by Israeli navy commandos on Thursday in international waters.
An official statement from the Palestinian Authority categorically denied involvement: "The Palestinian leadership denies any link with the boat and expresses its great surprise that it is being associated with this affair at a time when it is engaged in a battle to halt the violence.
The ship was captained by a Palestinian naval police colonel and carrying at least 50 tons of Iranian weapons to the Palestinian Authority, according to the Israeli army.
Describing the vessel as a "ship of terror," Mr Sharon said the capture was "another milestone in an ongoing and just battle against the forces of terrorism, of the Palestinian Authority and its leader."
He said the "type and character of the weapons ... prove once again that the Palestinian Authority has been focusing its efforts on terrorism, in preparing the operational infrastructure for the next waves of terrorism."
The Palestinian statement said Mr Arafat has informed US envoy Mr Anthony Zinni the Authority was ready to take part in an international investigation together with the US, Europe, Russia, the United Nations and Arab parties.
A senior Palestinian official earlier dismissed Israel's claims that it had captured a massive arms shipment in the Red Sea as "exaggerated Israeli comedy" aimed at pumping up the Jewish state's flagging morale.
"This is an exaggerated Israeli comedy," said parliamentary affairs minister Mr Nabil Amr on Al-Jazeera television.
"This flexing of muscles clearly proves that Israel's leaders and security services which have failed effectively oppose the intifadafor 15 months need to appear as a superpower," he said.
"This is a government publicity campaign whose goal is to avoid making serious use of the chance for a ceasefire, a calming of tension and a return to a political solution to crisis," Me Amr said.
AFP