Prime Minister Ahmed Qurei announced that his choice for the post would not hold the job ? instead it would go to Arafat loyalist Hakam Balawi.

Both Israel and the United States, who have tried to sideline Mr Arafat, said they were disappointed at the outcome.

Mr Qurei is expected to seek parliamentary approval for his new cabinet at a meeting tomorrow. ?We have finalised with brother Yasser Arafat the final formula to form the new Palestinian cabinet,? Mr Qurei said.

?We also agreed on a formula to unify the work of the security services of the Palestinian Authority headed by President Arafat in order to fulfil all the obligations to end chaos and achieve a security.? Mr Balawi will have responsibility for police, civil defence and preventative security.

The all-important job of security will be handed to the Supreme National Security Council, of which both Mr Arafat and Mr Qurei are members. The council was set up in September to oversee the security services in the Palestinian territories.

?Sad day for reform?

The Israeli Government has already indicated its attitude to the new cabinet.

?This is a sad day for reform, because we see that the control of the security services remains in the hands of Arafat?s cartel of terror,? said Raanan Gissin, an adviser to Israeli Prime Minister, Ariel Sharon. Washington was also critical, saying Palestinian leaders must act quickly to end the continuing violence. ?The Prime Minister must have control of all of the security forces and insist that terrorists and military organisations not under the control of the Palestinian Authority be disarmed and dismantled,? US State Department spokeswoman Amanda Batt said.

But Saeb Erekat, appointed minister for negotiation affairs in the new Palestinian cabinet, said Israel?s reaction was ?unacceptable?. ?The focus should be on reviving the peace process and (...) implementing the roadmap,? Mr Erekat said.

Important post

Mr Qurei?s announcement comes after weeks of arguments with Mr Arafat about the composition of the cabinet.

The president had rejected Mr Qurei?s choice for Interior Minister, Nasser Yousef. The Interior Minister is important because he or she is meant to be in charge of the Palestinian security forces ? an issue that goes right to the heart of any attempt to get the peace process going.

Disagreement over the same issue led to the resignation of the last Prime Minister, Mahmoud Abbas ? otherwise known as Abu Mazen ?two months ago.

The formation of the government was intended to pave the way for the renewal of high-level talks with Israel.