Israel launched massive air raids across the West Bank and Gaza, piling pressure on Yasser Arafat with a rocket strike on a police post next to his offices, after Prime Minister Ariel Sharon branded his administration a "sponsor of terrorism."
Israeli F-16 warplanes launched a series of strikes on Gaza City, while Apache helicopters fired rockets on Palestinian security offices in Khan Yunis in the southern Gaza Strip and on the West Bank towns of Salfit and Tulkarem.
They also fired missiles on a security post just metres (yards) from Arafat's offices in Ramallah, but the Palestinian leader, who was in his office at the time, was unhurt.
But two policemen were slightly wounded, officials said.
Israeli army spokesman Brigadier General Ron Kitrey said Arafat was not targeted.
Two people were killed in the Gaza strikes and around 120 injured, half of them schoolboys, Palestinian hospital officials said.
The attacks came as Israel's dovish Foreign Minister Shimon Peres said he did not believe Israeli forces would take direct action against the Palestinian leader.
The strikes also came a day after Sharon, furious that Arafat had not stopped hardline Islamic groups, who killed two dozen Israelis in devastating suicide attacks at the weekend, ordered his forces to blast symbols of Arafat's power.
Gunships destroyed Arafat's three helicopters in Gaza City, while bulldozers ploughed up the runway at Gaza international airport used by Arafat for his frequent travels abroad.
Palestinian officials called Sharon's campaign an attempt to topple Arafat and destroy his self-rule Palestinian Authority.
Arafat himself told CNN television that Sharon was trying to torpedo his own crackdown on terrorism with the airstrikes.
"He doesn't want me to succeed, and for this he is escalating his military activities against our towns, our cities, our establishments," the Palestinian leader said.
French Foreign Minister Hubert Vedrine accused Israel of conducting a deliberate policy aimed at eliminating Arafat.
"Arafat has been weakened by the harassment of the Israeli army ... and as a result people are using his weakness as an argument to say that since he can not re-establish order in his own camp, he should in some way be eliminated."
However, Britain's Prime Minister Tony Blair and US President George W. Bush expressed "sympathy" with Israel and called on all sides "to do anything they can to stabilise the situation."
Sharon's hard words and air strikes opened major divisions in his cross-party government, with left-wing Peres denouncing what he called a bid during Monday's emergency cabinet meeting to cause "the downfall of the Palestinian Authority."
The region had been braced for a huge Israeli retaliation after three Palestinian suicide bombers from the hardline Islamic movement Hamas killed 25 people on Saturday and Sunday in the suicide attacks in Jerusalem and Haifa.
Sharon made a national address after blasting Gaza City and Jenin in the West Bank, accusing Arafat of having "chosen the path of terrorism," and being "the greatest obstacle to peace and stability in the Middle East."
Peres said the move by Sharon's dominant right-wingers "in effect means Israeli policy is based purely on force with no political hope."