Yasser Arafat has instructed Palestinians to enforce a cease-fire. In response, Israel has also implementing a cease-fire and is pulling back from Palestinian areas. Israel has in the past said it wouldn't negotiate under fire. The article further says "Militant Islamic groups said that despite calls for a total cease-fire, they would keep up their attacks against Israel because it still occupies Palestinian land. Groups like Hamas and Islamic Jihad will make sure to attack Israel in the next few days probably ending the cease fire.
It appears that Israel is willing to stick to it's guns and not negotiate under pressure. Arafat has failed to stop the terrorist groups for a year to little effect. Maybe he will see the benefits of reigning in the terrorist groups to see if a settlement can be reached. If Arafat can't (or won't) stop terrorism from his own back yard now, how will he do it from a Palestinian state?