RAMALLAH, July 20: The Palestinian cabinet failed on Tuesday to resolve a leadership crisis as Prime Minister Ahmed Qorei agreed to stay on for now but kept a threat to quit "because he has no powers", officials said.

Mr Qorei is frustrated over President Yasser Arafat's refusal to allow him to reform Palestinian institutions widely seen as corrupt and out of touch. International mediators regard reforms as crucial to reviving Palestinian-Israeli peace talks.

A senior Palestinian official said Qurie, who decided on Saturday to quit over unprecedented pro-reform unrest, told a crisis cabinet meeting he would remain in his post for now but would not formally withdraw his tendered resignation.

Palestinian Negotiations Minister Saeb Erekat said Qurie was still deadlocked with Arafat over the president's unwillingness to cede him powers to launch meaningful reforms, particularly to a murky jumble of security services ridden by cronyism.

"President Arafat insists on rejecting the resignation," Erekat told Reuters. "Abu Ala (Qurie) insists on resigning. The crisis goes on." Another senior official said Qurie wanted out essentially because he had no powers to effect change, or even to resign.

Qurie, in office since November, quickly departed after the cabinet adjourned, declining to take questions from reporters. In violence along Israel's northern frontier with Lebanon, Hizbollah guerrillas shot dead two Israeli soldiers and lost one of their own fighters, a day after the group accused Israel of killing one of its senior members.

Israel warplanes, in what a military source said was a message to the Lebanese government to take control of the south, broke the sound barrier over Beirut after the soldiers' deaths.

But one senior military source said Israel wanted to avoid inflaming tensions further along the frontier. Participants in the Palestinian cabinet meeting said the main issue was Qurie's demand that Arafat "empower" the interior minister to overhaul overlapping security services that answer to the president. Arafat has balked at this in the past.

Arafat is facing the stiffest test of his leadership since Palestinians obtained limited self-rule from Israel in Gaza and the West Bank a decade ago. Some fear the strife could eventually escalate into civil war. -Reuters