As far as I can figure things out, the only near-term hope for peace
in this conflict is for the Palestinians to devote themselves to a
debilitating and bloody civil war; until the average Abdul decides
that he's had enough of the hatemongers. Given the depth of the
indoctrinated hatred for Jews/Crusaders, it will require a pretty
grim reality check to change people's minds and make peace look
like a good idea. A war of succession fills the bill nicely.

If Arafat is killed by Israel, whoever gets there first has a great
rallying cry; and will be able to inherit his mantle for a little
while. (If another Palestinian kills Arafat, it'll be
blamed on Mossad anyway.) I don't know if things will get worse for
Israel, but it postpones the necessary civil war.

But if Arafat keels over on his own, he has no clear successor and
nobody has a clear rallying point. You get a power struggle, and
some of the suicide bomb tactics will start to be used against other
factions.

It won't be pleasant for Israel: all sides will try to be more
anti-Semitic-than-thou.