All of the funds which foreign countries had donated to the Palestinian Authority, a total of $5bn “have gone down the drain, and we don’t know to where,” he added.

Mr Arafat’s policies had brought about a situation in which Palestinian lives were in ruins. “The Palestinian situation is not putting up with any more corruption, and there is no escape aside from reforms that Arafat himself has authorised,” Mr Dahlan said.

He is rumoured to have instigated a series of incidents against Gaza security chiefs appointed by Mr Arafat and accused of corruption. But this is the first time he has publicly attacked the leader and placed himself at the head of an emerging reform movement.

Mr Dahlan, 43, has broad support in the Gaza Strip and is respected by Israel and the United States. Like all critics of Mr Arafat, he believes it is vital that he should remain leader of the Palestinians but more efficient managers should handle Palestinian affairs.

Israel’s proposal to withdraw from settlements in the Gaza Strip has created a sense of urgency about reforming the authority and removing a generation of bureaucrats appointed by Mr Arafat and seen as corrupt and incompetent.

Yesterday gunmen loyal to Mr Arafat broke up a conference attended by Palestinian legislators in Ramallah, saying the meeting was part of a conspiracy against him.

Seventy members of Fatah, Mr Arafat’s faction, were meeting to discuss reform and growing anarchy in the Palestinian territories when the 20 men burst in and fired into the ceiling.

The meeting was ended, but not before a letter was drafted to Mr Arafat denouncing the lawlessness and corruption in the authority.

“President Arafat, this may be the last chance for reforming our situation before reaching the end. We need a revolution within our Fatah movement,” it said.

Last month militants kidnapped Ghazi Jabali, the chief of police, and demanded his dismissal.

Mr Arafat’s proposed replacement, his relative Moussa Arafat, was seen as even more corrupt and he was forced to withdraw the appointment.

The kidnapping was the first sign of an emerging confrontation between Mr Arafat’s old guard and reformist politicians and militants who are determined that the authority should become democratic.

Since Mr Arafat returned to the Palestinian territories in 1994 he has been accused of presiding over an almost feudal regime in which his appointees grow rich on public funds in return for their loyalty.

Since Ariel Sharon, the Israeli prime minister, proposed withdrawing from the Gaza settlements, Palestinian lead ers appear to have had no strategy to improve the position of their people.

In recent months Mr Dahlan has been tentatively setting out a platform on which to oppose Mr Arafat.

In a succession of interviews he has said that the Palestinians must choose whether they want war or peace with Israel. War has clearly failed, he says, leaving peace as the only viable option.

In contrast to Mr Arafat’s strategy of ambiguity, condemning violence but doing nothing to stop it, Mr Dahlan said the authority should pre vent attacks on Israel for its own sake. Last week Ahmed Qureia, the Palestinian prime minister, retracted his resignation after Mr Arafat agreed to a series of reforms. But he has made such promises before and then been reluctant to allow the dismantling of his power structure.

o Israeli troops opened fire in a Gaza Strip refugee camp early today, killing a 60-year-old woman and wounding four other Palestinians, witnesses said.

Yusuf Mugrabi, 54, who was in the Fatah organization that backs presidential candidate Mahmoud Abbas, said he was not voting because he was not convinced it would make any difference. “I am afraid that Abu Mazen [as Abbas is known] will give everything away.”

Mohammed, a former fruit seller who was Sunday helping to clear the rubble from the remains of the family’s house, said he had chosen not to follow the violent path of his brothers. He went early Sunday to the school in the camp being used as a polling station: “I voted today for Abu Mazen. Maybe he will release the prisoners.”

Mohammed was one of hundreds of thousands of Palestinians who turned up at the 1,077 polling stations in the West Bank and Gaza to vote in the first presidential election since Yasser Arafat was elected virtually unopposed in 1996. Many others joined Yusuf in staying at home. Expectations were generally low that Abbas will herald a significant change in relations with Israel.

Sayafa, a community of about 500 people in the north of Gaza, is normally closed except between 8 a.m. and 9 a.m., and 3 p.m. and 4 p.m. Sunday, to help the Palestinians elect a successor to Arafat, the Israelis allowed the residents freedom to come and go between 8 a.m. and 5 p.m.

“It’s like a festival. I cannot remember the last time I could leave the village without worrying about rushing back before the gates shut,” said Adham Ghoul, 31, a farmer. The Israeli army, for the most part, honored its pledge to ease movement for Palestinians on polling day. Some checkpoints were removed while others were only loosely policed, and most of the normal queues disappeared. “I voted for Abu Mazen because I hope that it can become always like this. This is like being released from prison,” said Ghoul.

His neighbor, Said Ghudeinah, 37, also a farmer, said he had walked for an hour to vote for Abu Mazen Sunday. “I wish he will bring us peace and end our problems so that we can live like anyone else in the world.” However, like many Gazans, he felt that he had no choice but to opt for Abu Mazen. “The world has chosen him, so what can we do? Only God can tell if he will be a good leader. I was a member of Fatah, so whatever the movement says I will follow,” he said.

In spite of the relaxation, the Palestinians and international election observers complained of restrictions. Roadblocks were still in place round Nablus, where an Israeli soldier was killed on Friday. The worst abuses were in east Jerusalem, which Israel claims is part of Israel, even though the bulk of the population is Palestinian. Allowing the Palestinians to vote in Jerusalem would be tantamount to acceptance that they have a claim on Jerusalem’s sovereignty.

The Israeli authorities opened counters in only half a dozen post offices for Palestinians to vote in, not enough for the tens of thousands entitled to vote. Many Palestinians in east Jerusalem said they did not want to vote in case Israel used it as an excuse to remove their residency rights.

Among those turning up to cast a ballot at the post office in Saladin Street, under the walls of the Old City, and being unable to vote was Bader Salah, 31, a driver. He said he had registered to vote but the post office disputed it. He was taken instead by a minibus on a 20-minute drive to Zaim, which Israel classifies as part of the West Bank rather than Jerusalem.

The buses ferrying disappointed voters from Jerusalem to the outskirts were run by Fatah, the dominant Palestinian faction. But Salah said no pressure was put on him to vote for any particular candidate. He refused to say who he had voted for but added: “I am pessimistic about Abu Mazen being able to deliver. Peace with these people [Israelis] is not possible.”

Abdullah al-Jaferi, 22, a student, shared this sentiment. He voted at Dheisheh but said many others would not because they saw Abbas as the chosen candidate of Israel and the U.S. He voted for Abbas because he “is the only person who can provide us with security and a better life,” though he said that in the end the Israelis would claim that Abbas was an obstacle to peace, just as they had with Arafat.

Mustapha Ehkmyis, 78, a refugee since 1948, was outside the polling station but refused to vote. “I support democracy but do not like any of the candidates. I will not vote for Abu Mazen because he accepts the idea of just the West Bank and Gaza. I want the whole of Palestine, from the river to the sea,” he said.

The various factions taking part held noisy debates outside the polling stations, those in the black and white scarves of Fatah jostling with those in the red headbands of the Popular Front for the Liberation of Palestine. But there was little violence.

The US administration signalled at the weekend that it was abandoning its long-term call for a freeze on all settlement activity and would back some limited expansion.

But a Downing Street spokesman said yesterday: “Our position is consistent with the statement put out by the European Union last week, and our view is that the Israelis should freeze all settlements.”

The EU had expressed its dismay over new construction in the occupied territories.

The Palestinians claim the presence of the 120-150 Jewish colonies, home to about 200,000 people, makes the creation of a viable Palestinian state impossible in the West Bank.

The total number of permits to build settlement homes in the West Bank this year is 2,167  more than in the previous three years combined.

However, analysts of Israeli expansion claim the latest construction tenders are the tip of the iceberg, and that surveys of infrastructure work and local plans suggest that Israel plans further expansion.

Dror Etkes, the coordinator of Settlement Watch, said: “This is all part of something much bigger. There are dozens of settlements where the land has been bulldozed and roads have been built where the government is just waiting for the right moment to begin house construction.

“This is about redesigning Israel and moving the bulk of it eastwards on to the land on which the Palestinians want to build their state. It is a continuation of a process that has been going on for 40 years.”

The boom in the settlement expansion appears to have the tacit endorsement of US president George Bush’s administration. In return, Mr Sharon has promised to withdraw from the much smaller number of Jewish settlements in the Gaza Strip.

The scale of building in the West Bank can be seen by the scores of heavy lorries, laden with building materials, which daily progress up from Israel’s coastal plain to east Jerusalem and the West Bank. Some are destined for Ma’ale Adumim, an established settlement near Jerusalem with a population of 30,000.

There is large-scale construction going on, despite the apparent existing housing glut: many of the newer neighbourhoods in the settlement appear sparsely populated, while others are empty. Hoardings advertise new developments, even on sites where nothing has been built. Dual carriageways and service roads loop into areas where the earth has been flattened, but no foundations sunk.

The architect-designed houses and lush lawns of Ma’ale Adumim are in stark contrast to the ugly apartment blocks and dusty streets that mark the nearby Arab neighbourhoods.

According to the Israeli newspaper Yedioth Ahronoth, a married Israeli couple who have completed military service and have one child would receive a #25,000 subsidised loan to buy a home in the West Bank, compared with #19,250 in the Negev and #10,875 in Tel Aviv.

Jeff Halper, a veteran Israeli campaigner against the settlement expansion, argues in his book, Obstacles to Peace, that Israel’s long-term strategy is to move the centre of gravity of the country from the coastal plain by encouraging more people to live in the West Bank.

This policy also entails the hemming of the Palestinian population into small cantons which have no direct contact with other Palestinian cantons, making a viable state impossible.

 The army has agreed to make changes to the route of Israel’s separation barrier in 12 areas, Dany Tirza, an official of the Israeli defence ministry said yesterday. The supreme court ruled this summer that the barrier violated the human rights of Palestinians.

The route will be moved towards the “green line,” the 1967 border between Israel and the West Bank, Mr Tirza said. The changes will prevent the confiscation of more than 4,000 acres (1,620 hectares) of Palestinian land, he added.

“Likud will not disqualify or boycott anyone,” he told party members, as hecklers chanted, “yes to Likud, no to Labour”.

He continued: “The Likud will conduct negotiations with all Zionist parties for expanding the coalition.”

But the latest rebuff comes after the wider party voted in a referendum in May against dismantling settlements in Gaza, and observers are now wondering if the prime minister can continue to lead his divided party.

Dalia Itzik, a spokeswoman for the Labour party, said new elections were all but inevitable as Mr Sharon would emerge from the vote a “lame duck prime minister”.

In his pre-vote speech, Mr Sharon had tried to harness the spirits of past leaders of the Israeli right wing.

“You must make your voices heard loud and strong, a national and responsible voice, like the voice of Menachem Begin who prevented a civil war on the eve of Israel’s establishment and who led to unity on the eve of the six day war … Israel is waiting for that,” he said.

The prime minister, who, more than anyone, has made the right a force in Israel, was rejected by the party he helped create. He can continue to govern but without the moral authority to do anything but manage the country.

The debate in the Likud party has also been fuelled by a series of personal and party rivalries. “Unfortunately there is a group within the party that has been plotting against the government since its establishment,” Mr Sharon told the convention earlier.

Binyamin Netanyahu, a former prime minister and current finance minister, is torn in several directions. He is from the right but appreciates Jerusalem’s dependence on the US and the need to create a situation in which Israel can keep the parts of the West Bank it wants.

Also, as finance minister he has introduced Thatcherite reforms anathema to Labour. Perhaps most importantly he has leadership ambitions of his own and is loth to make life easy for Mr Sharon.

Silvan Shalom, the foreign minster, has clearly identified himself with the rebels because if Labour joins the coalition it is very likely he will lose his job to Shimon Peres, the opposition leader.

And while Mr Sharon takes on his own party he is also negotiating with his current partner, Shinui, a party which has pledged never to sit in government with the ultra-orthodox groups.

The prime minister has called their bluff and started negotiating with United Torah Judaism and Shas. Both parties demand as a minimum a halt to all Shinui-inspired secular legislation such as a bill introducing civil marriages.

Behind all the manoeuvring is also the suggestion that Mr Sharon does not really want to form a government but would like to create a situation whereby he can call elections without being seen to be the cause of them.

If that is so the possibility of early elections, which most Israeli pundits suggested would occur within the year, increased last night.

According to analysts, Mr Sharon realises his divided party is no vehicle in which to attempt the withdrawal from the Gaza settlements.

To achieve this he needs to create an electoral vehicle, combining Shinui, Labour and the centre of Likud, that can draw the maximum votes from the 60% of the Israeli population that favours withdrawal not only from Gaza but from the West Bank settlements.

The warning came as Israeli helicopters fired two missiles last night at an alleged Hamas weapons workshop in the Khan Yunis refugee camp in southern Gaza.

One of the missiles exploded in the empty shop, residents said, but the other failed to explode. There was no immediate report of casualties..

The protests in Gaza were the work of Fatah, Mr Arafat’s political faction. But the violence and kidnappings were the work of two of its offshoots.

Abu Shakir is a leader of one, the al-Aqsa Martyrs Brigade. The other is the Abu Rish Brigade, which kidnapped and released four French aid workers last Friday.

The main Islamist groups, Hamas and Islamic Jihad, have remained on the sidelines but support the protests.

Abu Haroun, a leader of the Abu Rish Brigade, said his group would take unspecified action if it was ignored. Speaking from a meeting place of the group, about 100 metres from Israeli positions, he said: “Promises were made to the victims of the intifada, those that lost homes, lives and limbs. But they were given nothing unless they had good connections. It is our duty to look after the victims regardless of their connections.”

The Abu Rish Brigade was formed in 1994 and named after Ahmed Abu Rish, a Fatah leader assassinated by Israel five days after he was released in an amnesty. The group claims to have lost 52 men fighting Israel.

Abu Haroun criticised officials who have kept their jobs despite their incompetence. “Maybe they start their jobs well but after a few years they start to only think of themselves and that’s when they start building their big villas and flooding foreign bank accounts,” he said.

The group would not harm hostages, who were just a means of delivering a message. “We thought long and hard about doing it because we value the work of humanitarian workers and journalists, but we thought we had no choice. In the end we had more television coverage than if there had been 20 people killed in Khan Yunis, and they were not even harmed.”

Both groups said they had not coordinated their protests on Friday over the appointment by Mr Arafat of his cousin, Moussa Arafat, as head of the police.

“Moussa Arafat was just the biggest and worst symbol of corruption,” said Abu Shakir.

“What Arafat has done so far is not a response. Just shuffling a few people around suggests he is just behaving in the same manner as before.”

The weekend disturbances in Gaza coincided with Mr Qureia tendering his resigna tion. Speaking from a rare patch of green grass in Khan Yunis, Abu Shakir added: “We are for reform. Not for Ahmed Qureia. If anything he is part of the problem. We see him as part of the old guard.”

There is also speculation that Mohammed Dahlan, the former interior minister, is behind the anti-Arafat protests. He is popular in Gaza despite his connections with Israel and the US. Abu Haroun said: “We speak to Dahlan and he speaks to us and we respect each other. But we act independently.”

Both groups feel their messages have been delivered. But they warn if they are ignored there could be an escalation in the situation in Gaza.

Abu Haroun said: “I cannot say what we will do but you will know all about it.”