By Peter Biles BBC correspondent in Jerusalem

Palestinian leader Yasser Arafat is facing an unprecedented challenge to his leadership after the entire Palestinian cabinet resigned rather than face an embarrassing no-confidence vote.

His supporters want to portray the parliamentary rebuff to Mr Arafat - at a special parliamentary session in Ramallah - as evidence of a new era of democracy for the Palestinians.

Opportunities abound says Saeb Erekat - here refusing to listen to heckling of Mr Arafat

Saeb Erekat, a Palestinian Authority cabinet minister, said: "This will be viewed as a landmark in our history."

However, the widely-held view among many Palestinian critics - and also in Israeli circles - is that this is a huge political blow to Mr Arafat.

One of his longest-serving colleagues, Salah Taameri, says there is a crisis of confidence among those ministers close to the Palestinian leader.

'Hegemony challenged'

The Israeli Defence Minister, Binyamin Ben-Eliezer, described the resignation of the Palestinian cabinet as "a vote of no-confidence in Arafat".

The English-language Ha'aretz newspaper in Jerusalem says it is the first time that members of Mr Arafat's own Fatah movement have "so crudely challenged his hegemony". With 55 MPs, Fatah dominates the 88-seat legislature.

For many months, Israel - and the United States - has been stepping up the pressure on Yasser Arafat, trying to marginalise him, and repeatedly insisting that he has not done enough to prevent suicide bomb attacks against Israel.

Deputies had threatened to vote down the cabinet

However, for much of this year, Mr Arafat has been confined to his headquarters in Ramallah in the West Bank, where he is often surrounded by the Israeli army.

The Palestinian MPs met inside Mr Arafat's compound on the first day of this week's parliamentary session, instead of at the Palestinian Legislative Council (PLC) offices.

Mr Arafat is known to be nervous about leaving his compound in case it is then taken over by the Israelis.

On Wednesday, Palestinian MPs threatened the vote of no confidence because of Mr Arafat's recent cabinet reshuffle.

The debate centred not on the five new ministers appointed in June, but on other ministers accused of incompetence and corruption, whom Mr Arafat has failed to dismiss.

Failed ploy

Mr Arafat had hoped that by announcing the date for Palestinian presidential and parliamentary elections for 20 January, he would be able to pacify the MPs with a "caretaker" government and head off the no-confidence vote, but his ploy failed.

Palestinians remain angry at the Israeli army's level of control over them

There appears to be much soul-searching among Palestinians about the intifada, which began nearly two years ago, and the need for reform of the Palestinian Authority.

Many Palestinians are clearly frustrated and angered by the economic hardship they are suffering as a result of the continuing Israeli occupation of West Bank towns.

Mr Arafat has two weeks to present a new cabinet to the parliament and - with elections now just four months away - this is certain to be a testing time for the Palestinian leader.