The deal, worth "millions of dollars" of modern arms to Palestinian groups, was arranged in a secret meeting in Moscow last May between top aides to Arafat and Iranian officials, when the Chairman of the Palestinian Authority was visiting Russian President Vladimir Putin, the paper said in a report published Saturday, without identifying the sources.

Israeli officials said they are alarmed by the PA's alliance with Iran, because it provides the Palestinians with a powerful and well-armed patron.

NYT quoted Israeli security officials saying that Mr. Arafat sought a deal with the Iranians for a more serious alliance: In exchange for a more professional approach to arms support, Mr. Arafat agreed to provide Iran with access to Palestinian intelligence on Israeli military positions and defences, they said.

Follow-up meetings were also held between the Palestinians and the Iranians, but Israeli officials said the Iranians were careful never to hold any of the meetings in Iran for fear of exposing their involvement.

The new alignment is significant for several reasons, American and Israeli officials told the New York Times, observing that in recent years, Iran's support for international terrorism has been on the wane, with the notable exception of its ties to the Lebanese Hezbollah.

But American intelligence officials said that they believe that the onset of the Palestinian uprising known as the "Al-Aqsa intifada" in September 2000 renewed the enthusiasm among Iran's hard-liners for terrorism.

The arms connection between Iran, one of the main supporter for all Palestinian and Arab groups opposed to any form of peace with Israel, came into public view earlier this year when the Israeli forces captured the "Karine A", a cargo ship carrying 50 tons of Iranian-made and supplied arms, including antitank and anti-helicopter rockets and missiles that could reach most cities in Israel.

"The Karine A was a direct outgrowth of the secret meeting in Moscow last May between Mr. Arafat's representatives and Iranian intelligence officers", "Jerusalem Post" quoted senior Israeli security officials as having said.

The shipping venture followed several failed attempts to smuggle weapons from Lebanon by sea into the Gaza Strip. Israeli officials said there was at least three bungled attempts before that, including one earlier shipment by the "Santorini", a fishing vessel carrying weapons bound for Palestinian extremists.

Palestinian Authority officials dismissed the charges of any Iranian involvement in their struggle against Israel and denied that Arafat knew of the arms shipment. They said the allegations were an attempt by Israel to discredit the Palestinians and to justify Israel's military operations in the West Bank and the Gaza Strip.

"This is a factory of lies", Yasir Abed Rabbo, the Palestinian minister of Information, said. "Israel is like any colonial power. When they get in trouble, they try to blame outsiders. There has not been a single Iranian here since the 14th century."

But New York Times said its American and Israeli sources believe Arafat personally approved the dealings with Iran.

"There's plenty of evidence to show that it wasn't a rogue operation", a senior State Department official said of the weapons ship Israel, adding: "But there is no question that at some point the Iranians and people very close to Arafat came together and that Arafat was fully aware of it", said a senior State Department official.

The Israelis have been unable to tie the shipment directly to Mr. Arafat, but Israeli officials said the involvement of senior Palestinian Authority officials and Mr. Arafat's well-known attention to financial details created a strong circumstantial case for his knowledge of the operation.

"Though aware of the fact that the operation might be monitored by the Americans, who have a large military presence in the area, yet the weapons were loaded by the Pasdaran (the ayatollahs praetorian Guards) on the "Karine A" at Qeshm island, situated at the entrance of the Persian Gulf", the source told IPS.

American intelligence officials said Iran's Revolutionary Guards and intelligence service had considerable latitude for supporting Iranian proxies. They also supported Israeli assertions that Iran had become deeply involved in backing Palestinian militants, both through Hezbollah and in the training and financial support from Iranian intelligence agents.

Jordanian intelligence officials said they had thwarted many attempts by Iran and its proxies to mount attacks against Israel from Jordan. Last weekend, Sheykh Hassan Nasrallah, the secretary general of Hezbollah, criticised Jordan for blocking the group's efforts to smuggle weapons to the Palestinians.

United States officials said, for instance, that the Palestinian Islamic Jihad, one of the groups behind the wave of suicide bombings in Israel, is financed and directed by Iran. American and Israeli officials said that since the beginning of the Palestinian uprising 18 months ago, Tehran had paid millions of dollars in cash bonuses to the group for each attack against Israel.

Hamas, a far larger Palestinian extremist group, is also believed to receive Iranian support, though officials here in Israel and in the United States said its ties to Iran were less direct, as it has its own independent means of raising money and recruiting members, so Iran is believed to have less influence over the group.

Operatives of Islamic Jihad of Palestine and Hamas have been trained in Hezbollah camps in southern Lebanon and some have received specialised training inside Iran, American and Israeli intelligence officials said.

In fact, Israeli and American officials believe that the 18-year struggle by Hezbollah in Lebanon, backed by Iran, provided a model for what Tehran would like to recreate on the West Bank and the Gaza Strip.

"The strategy is to make the West Bank another Lebanon", said one senior American intelligence official.

Israeli officials say they have seen no evidence of Iranian intelligence operatives working directly in the West Bank or the Gaza Strip. Instead, they said, Iranian and Hezbollah operatives meet with Palestinian militants and their intermediaries in Syria, Jordan and Lebanon.

George J. Tenet, the director of central intelligence, recently told Congress that Iran's political reformers were losing momentum in the long-running battle for power with the conservative clerics who back Palestinian and Arab extremist groups.

Led by Ayatollah Ali Khameneh'i, the Iranian regime’s leader, the conservatives control the Iranian armed forces, intelligence and security agencies as well as the State-run radio and television networks.

In an address to Iranian officials made on the occasion of the Iranian New Year that started on 21 March, Ayatollah Khameneh'i bluntly rejected any dialogue with the United States.

His veto came after some Iranian reformists, including lawmakers and the government had welcomed a proposal formulated earlier by Senator Joseph Biden, the Chairman of the Senate Foreign Affairs Committee to meet Iranian counterparts.

Mr. Tenet also warned that there had been little reduction in Iran's backing for terrorism and said that Tehran had failed to seal its eastern border with Afghanistan to block the escape of Al-Qa’eda members.

American officials echoed their concern and said they were also worried by intelligence reports that Teheran is harbouring Al-Qa’eda members, including a leader who recently tried to mount an attack against Israel from his sanctuary in Iran.

American officials said there are evidences that some Iranian officials have allowed Al-Qa’eda to use the country not just as a transit point after escaping Afghanistan, but as a staging area.

For months, Tehran adamantly rejected American-fed information that members of Ala’eda and Taleban had taken refuge in Iran, insisting that the allegations were "baseless and undocumented".

Iran rejects American accusations that it is sending arms, money and professional saboteurs to Afghanistan to destabilise the interim government of Mr. Hamed Karzai, citing the support it provided to the anti-Taleban forces of Northern Alliance during the rule of Taleban over Afghanistan.

Abu Musaab Zarqawi, a senior Al Qaeda leader who fled the western Afghan city of Herat after the American military campaign began, has turned up in Tehran under the protection of Iranian security forces, according to senior Israeli and American officials.

Last month, Mr. Zarqawi dispatched three Afghan-trained operatives to attack Israel, Israeli officials said. The three, two Palestinians and a Jordanian, were arrested when they crossed from Iran into Turkey on 15 February.

United States intelligence officials say the mounting evidence of Tehran’s renewed interest in terrorism; including covert surveillance by Iranian agents of possible American targets abroad increasingly concerns them.

Iranian actions to destabilise the new interim government in Afghanistan, its willingness to assist Al-Qa’eda members and its fuelling of the Palestinian uprising are prompting a reassessment in Washington, officials say.

As a result, President Bush identified Iran, Iraq and North Korea as an "axis of evil" in his 29 January State of the Union Address to Congress, in which he clearly distinguished between the "un-elected but ruling minority" with the Iranian people.

The characterisation angered both the conservatives and some reformists, including the embattled president, but the intelligential widely blamed Ayatollah Khameneh'i for the situation, noting that if he would have controlled himself ushering vulgarities and war-like speeches on the American Administration in general and President Bush in particular, Iran could benefit from the 11 September fallouts.