<DEBKAFile has an article on two paths that Arafat can choose now that he is free. I thought that these were well thought out, and probably closely reflect the real situation:

...The Palestinian leader dickered because he needed to settle opposing compulsions emanating from two factions inside his own camp:



Faction one:

Four top Palestinian officials - his official deputy Abu Mazen, Palestinian legislature speaker Abu Ala, his spokesman Yasser Abed Rabbo and his financial adviser Mohammed Rashid, demanded that Yasser Arafat abandon his radical stance and his strategy of terror. This group, the pro-American-Saudi faction of the Palestinian leadership, wants him to use the fresh opportunity presented him to rebuild the Palestinian Authority on lines that will bring the Palestinian people to recovery. Deeply distressed from 20 months of Intifada, the ordinary Palestinian has hardly any money and many are on the point of starvation. Arafat’s aides told him that the radical national-Islamic line he chose to follow along with the Hamas, Jihad Islami and Hizballah, oriented on the Iran-Syria-Iraq axis, had run its course. The Palestinians have been beaten back by the US war on terror and Israel’s Operation Defensive Shield.
Now, he must seize the moment; the Americans, the Saudis and the Arab world are prepared to restore his fortunes and governing institutions – for a price. White House spokesman Ari Fleischer and Secretary of State Colin Powell spelled this price out very clearly: As soon as he is free, he must embark on the fight against terror.
In other words, he must abandon his Intifada.

The West bank security chief, Jibril Rajoub heads the military arm of this faction. Although his credibility is low among his own people, and Israeli forces demolished his Bitunia command center, Rajoub is alone in retaining a functioning militia and the only one continuing to pay regular wages to his 3,000 men. The money comes from sources interested in restoring Arafat and his Palestinian Authority as a non-terrorist entity - Americans, Europeans and certain Israeli circles.

Faction two:

This group is closest to Arafat’s real thinking. Its top members are Tawfiq Tirawi, the intelligence chief who is the real commander of the Fatah’s al Aqsa Martyrs’ Brigades; Sahar Habash, the Palestinian leader’s gofer, who is still working hard to hold together the extremist Fatah-Hamas-Jihad islami-PFLP- Hizballah alliance.
Ahmad Saadat, secretary general of the hard-line Popular Front for the Liberation of Palestine – PFLP.
Muhamed Dahlan, head of the Gaza Strip preventive security service, whose heart and mind belong with faction one. But his loyalty to Arafat is absolute and where Arafat leads, he will follow. Dahlan commands a trained militia that rivals that of Rajoub.

This faction said to Arafat: You are very near the peak of your achievements. Don’t throw it all away now. For 20 months, you stood up to Israel’s military might and survived; almost single-handed, you – not Bin Laden – held off the American assault on Iraq by keeping American and Arab leaders fully engaged with the Palestinian issue.
You still have a reserve force, the Hizballah, which has not yet gone into all out action. Keep going, coordinating with Iraq and the Hizballah, and the Americans and Israelis combined will be defeated and you will triumph.
True, the plight of the Palestinian people is acute, but it is prepared for yet more sacrifice. A last effort and Arafat, Saddam Hussein and Hassan Nasrallah will rule the Middle East. So don’t desert the struggle for the sake of the American-Saudi golden calf.

Arafat did not have long to decide which path to opt for. He finally put his signature on the package on offer, signaling thereby his acceptance of the course advocated by faction one and accepting the well-funded US-Saudi plan to restore his authority and reconstitute it on constructive lines.

But at the last minute, he waged his usual war of nerves to squeeze what he can out of his situation.
Arafat while now aim to extract his reward in the coin of approval and funding for the reinstatement of his regime in a way that leaves in his hands sufficient budgetary authority to secretly bankroll basic repairs to his badly damaged terrorist infrastructure. Then he will be ready to return to the terrorist strategy with renewed strength.



Let's see where he goes from here. I'm afraid it's going to be option 2 myself.