Violence between Israelis and Palestinians will escalate even further and will probably hit the United States as well.
Forget the characterizations for a moment and look at it from a practical point of view. Both Arafat and the Hamas leader, Yassin, have been termed "terrorists" by the Israelis. And Israel is admittedly extremely powerful and well-informed about the movements of these men. The question then about Israel's reasons for not killing them can only be answered thusly : Because Israel has chosen not to.
Why has it chosen not to? Well, as the article linked by Clarkmeister says,
"Past Israeli governments were reluctant to target Yassin, fearing a firestorm of revenge attacks."
If that is so, let's ask ourselves not if Arafat or Yassin are criminals and not if they deserve to die. Let's ask ourselves if their killing (Yassin's for the monent) serves peace or serves a further descend into hell.
Then let's ask ourselves which of the two sides in the conflict is best served by such an escalation. (If you have troubles answering this question, try spelling "Bush Peace Road Map". Without laughing.)
Peace Now?