Intelligence briefings by Israeli officials have persuaded foreign diplomats that there is a case to answer but some say the evidence against Mr. Arafat is not yet conclusive.

Israeli politicians have long singled out Iran as the greatest threat to regional peace and have warned that the Islamic rulers in Tehran are developing nuclear weapons as part of a strategy to destroy Israel.

Those in the so-called peace camp said the threat from Iran made it doubly important to reach a settlement with the Palestinians in order to convert them into strategic allies in the fight against Islamic extremism.

Israel's withdrawal from southern Lebanon in May 2000 effectively ended its conflict with Iranian-backed Hezbollah. Israeli officials say Iran is trying to establish a new front line by extending its influence into the Palestinian territories.

Shaul Mofaz, Israel's Iranian-born chief of staff told fellow officers that the new Palestinian-Iran axis was established last April in renewed contacts between the two sides. The prime movers were said to be Mr Arafat and Ali Khameneh’i, Iran's spiritual leader, both of whom deny any involvement in the weapons smuggling affair.

If the Israelis manage to prove the connection, it would be the latest twist in an on-off relationship between the Palestinians and the Iranians that stretches back to before the 1979 Iranian revolution.

Mr Arafat was the first political leader to visit Ayatollah Ruhollah Khomeini after the founder of the Islamic Republic returned to Iran from exile. The visit was a recognition that the overthrows of the late Shah, Israel’s regional ally, and his replacement by a fiercely anti-Israeli regime represented a significant geopolitical shift in favour of the Palestine Liberation Organisation, then based in Lebanon and widely regarded internationally as a terrorist organisation.

Aside from ideological differences, the main factor in the rift was Palestinian support for Iraq during the eight-year war that followed the invasion of Iran by Saddam Hussein's forces in September 1980.

When Mr Arafat embarked on the peace process that was to lead to the signing of the Oslo peace accords, he was denounced by Iranian leaders for surrendering to the Zionist enemy.

In October 1998, after the signing of the Wye River agreement in which Mr Arafat undertook to combat terrorism, Ayatollah Khameneh’i called him a "traitor and a lackey of the Zionists". His outburst was followed by a suicide bomb attack in Gaza that the Palestinian Authority blamed on an Iranian-backed cell of Hamas.

Official Iranian policy is that Palestinians have the right to choose a negotiated settlement with Israel, even if Tehran did not approve, although refugees must first be allowed to return.

Although the Iranian government said Israel had wilfully misinterpreted his remarks, Shimon Peres, the Israeli foreign minister, accused Mr Rafsanjani of talking "like Hitler".

Mr Peres said that in Iran there was a hidden religious government "that has been financing, supporting, training and recently even pushing for terror attacks against Israel".

Some Iran experts have yet to be convinced that Mr Arafat was actively involved in the weapons smuggling plot, noting that he is still ritually denounced at gatherings held in Iran to support the Palestinian cause.

There were Arab press reports in April that representatives of Hamas, Palestinian Islamic Jihad, Hezbollah and Fatah's Tanzim militia met Iranian intelligence and Revolutionary Guard officials in Corfu. Hezbollah's Imad Mughniyeh, who is on the US "most wanted" list, was said to have been in attendance.

The Iranian chairman of the meeting was said to have stressed the importance of co-operation between the Palestinian groups and Hizbollah and of isolating and removing Mr Arafat from power by escalating the conflict.

Editor’s note: Mr. Morris is a veteran journalist who has covered Iran and the Middle East for many years. He was Reuters Bureau Chief in Tehran during the Islamic revolution of 1979

This article was published in Financial Times of 15 January and reprinted by the Student Movement Coordination Committee for Democracy in Iran