The Israeli government is proposing Mr Yasser Arafat be given a permanent base outside of the Middle East.
Officials in Israeli Prime Minister Mr Ariel Sharon's office have indicated they are ready to give the plan to European officials asking to visit Mr Arafat.
The diplomats wanted to see the Palestinian leader in his besieged office, but Israel says they can only meet Mr Arafat if they allow him to live in exile in their countries.
Israeli officials proposed allowing Mr Arafat to leave his headquarters, now surrounded by tanks and troops, if arrangements were made for him to live in exile outside of the Palestinian territories, reports the daily Haaretz.
The newspaper also said that Foreign Minister Mr Shimon Peres discussed the idea with Egyptian officials who rejected the plan.
Mr Peres told Israel Radio the aim of Israel's military offensive is to root out "terrorist nests." He said: "We didn't come to get rid of Arafat or to resume the military administration".
Mr Sharon said he was asked by European Union envoy Mr Miguel Moratinos whether Israel would permit Arafat to leave Ramallah.
"I told Mr Moratinos, if they would like, they will fly with a helicopter and will take him from here. First I would have to bring this to the Cabinet, second he can't take anyone with him, the murderers who are located around him there, and the third thing is that it would have to be a one-way ticket, he will not be able to return," Mr Sharon said.