In recent weeks, there have been demonstrations, riots and sit-ins by Palestinians calling for reform.
Prime Minister Ahmed Qurei repeatedly offered his resignation but Arafat, who controls all the real levers of power, refused to let Qurei go. The two have now reached a deal whereby the premier stays and gains extra powers over security bodies. London-based analyst Daniel Neep assesses that move.
"Although he [Qurei] seems to have had a victory in the short term, I think in the longer term, the situation has not been resolved. And fundamentally, there seems to be a consensus of analysis -- it doesn't matter who you ask at the moment -- most people see this problem as being centered upon Yasser Arafat," Neep said.
The wave of unrest began when Arafat tried to appoint his nephew, Moussa Arafat, to head the Palestinian security services. Militants who forced Arafat to back down claimed Moussa was a symbol of cronyism and corruption in the occupied territories and a representative of the "old guard" they say is unable to effectively confront Israel's hard-line policy.
Neep, of the Royal United Services Institute, says however that many ordinary Palestinians still find it hard to admit that Arafat is the problem, not least because the Israelis and many Western leaders want to see him removed from power.
"Arafat has this long history as the face of the Palestinian national movement, and he does have a certain degree of legitimacy because of that, and there is perhaps an equal body of opinion among Palestinians that, although Arafat might well not be the best leader we [could] have, but he is our leader at the moment, and it is not for external powers to dictate who we should have in charge," Neep said.
Palestinian Deputy Foreign Minister Abdullah Abdullah, in remarks to RFE/RL from Ramallah, says the ongoing strife with Israel is a distraction preventing the proper functioning of government in the Palestinian areas.
"The continued Israeli incursions into our towns and villages, the occupation, the destruction, the assassinations, all these distract the attention of our authority from directing its energy and its efforts to improving the structure, to reforming our institutions, particularly in the security area, where the security of the individual, the citizen, is in danger," Abdullah said.
In any event, Arafat's tenacious instinct for survival has hindered the growth of normal leadership patterns within the Authority. He has made sure that no successor is at hand who could replace him.
Present Prime Minister Qurei is not seen as having the charisma that would allow him to lead the Palestinians into a new era.
Prominent Israeli commentator Willy Gafni, former director of the International Center for Peace in the Middle East, says Israelis should not try to interfere in the question of the Palestinian leadership -- that they should keep their "fingers out of this pie."
But Gafni says a generational change would probably be a good thing for the peace process: "I think it may help the peace process, because it is a struggle between the young generation and the veterans, the old ones; Arafat's people, who came from Tunis, are now having a fight with the young, local leadership who were raised here in the midst of the conflict [with Israel]."
The young, says Gafni, are not so ideologically conservative as the old, and are more ready to recognize real negotiation opportunities, and to offer concessions.
Deputy Foreign Minister Abdullah defends the present political system, saying the deal struck between Arafat and Qurei has been well received by the Palestinian public, and that the government is now heading "in the right direction."
As to the persistent worries about corruption, Abdullah says that accusation has become a political tool.
"The idea to discredit us, or to dismiss us even, as a party in the area, by claiming we are living in a very corrupt society -- that is untrue, and especially when it comes from people who should look in the mirror before they address us in that fashion," Abdullah said.
Analysts note that the Israeli plan to withdraw forces from the Gaza Strip has put further pressure on the Palestinian Authority, in that its position in Gaza is much weaker than that of the Hamas militant organization, and this raises the question of whether Hamas will have to be offered a formal role in the administration of Gaza.