The Palestinian Authority has reacted angrily after US Secretary of State Colin Powell said Washington would no longer deal with Palestinian leader Yasser Arafat.

Palestinian officials said sidelining Mr Arafat would lead to anarchy and violence, and called on Palestinians not to meet Israeli or American delegations in response.

The American administration's policy is... entirely short-sighted, undemocratic and counter-productive

Hanan Ashrawi, Palestinian Legislative Council

But thousands of Palestinians who took to the streets in Gaza to protest against high levels of unemployment they say is caused by Israel's policies also turned their anger on the Palestinian Authority.

Speaking on US television on Sunday, Mr Powell said the US had no plans to speak to Mr Arafat either now or in the future.

His comments came days after US President George W Bush urged Palestinians to replace Mr Arafat with a leader "not compromised by terror".

Relations 'stagnant'

Mr Powell said that the White House was still talking to "a variety of Palestinian leaders" but had not spoken to Mr Arafat since President Bush delivered his speech on 24 June.

The US is talking to other Palestinian leaders, Powell says

He said contacts with the Palestinian leader were unlikely to be revived "because his [Mr Arafat's] leadership is flawed".

The secretary of state said it would not be possible to move the Middle East peace process forward unless there was a change in the Palestinian leadership.

He said the White House backed a two-state solution to the Israeli-Palestinian conflict, but achieving it "begins with new leadership that is fighting against terror, not tolerating terror or even encouraging terror".

'Chaos and anarchy'

Palestinian officials denounced Mr Powell's comments and warned of the consequences of replacing Mr Arafat.

[President Bush has] no plan, no agenda, no road map, no process, no substance

Saeb Erekat, Palestinian negotiator

Chief Palestinian negotiator Saeb Erekat told CNN that the alternative to Mr Arafat was "chaos, anarchy [and] more violence",

Palestinian cabinet secretary Ahemd Abdul Rahman urged Palestinians not to meet American or Israeli officials "as long as the Palestinian people are under siege".

He said Mr Bush had "no plan, no agenda, no road map, no process, no substance" in his policy towards the Middle East.

Another senior Palestinian politician, Hanan Ashrawi, told the BBC that the American policy was "entirely short-sighted, undemocratic and counter-productive".

She said that if the US rejected Mr Arafat, it might end up having to talk to radical Islamic parties instead.

Street protest

More than 4,000 demonstrators in Gaza held a protest initially aimed at the high levels of unemployment suffered by Palestinians since Israel banned them from crossing checkpoints to work.

But their anger also turned to the Palestinian Authority which they accused of failing to help ordinary people and of hoarding millions of dollars of international funding.

In the West Bank, the militant Islamic group Hamas vowed revenge after Israeli troops killed one of its top bomb-makers.

Ben-Eliezer said al-Taher's death was a major success

Muhanad al-Taher, 26, and one of his deputies died when Israeli special forces raided a house in the city of Nablus on Sunday.

Israeli Defence Minister Binyamin Ben-Eliezer said al-Taher, known to Palestinians as the Engineer-4, was responsible for the deaths of more than 117 Israelis in suicide attacks.

He said al-Taher's death was "the most important operation of the past two months".

Hamas, which has carried out scores of suicide attacks against Israeli targets said al-Taher's "assassination will increase [its] determination to continue jihad [holy war] and resistance".