Prime Minister Ariel Sharon suffered a painful political setback Sunday night at the hands of his rival, former prime minister Benjamin Netanyahu, when the Likud Central Committee adopted a resolution completely rejecting the creation of a Palestinian state.

At a raucous meeting in Tel Aviv, Sharon and Netanyahu went head-to-head over whether the party should vote on the resolution calling for the complete rejection of a Palestinian state. A proposal by Sharon to postpone the vote was defeated in a secret ballot by 669 (59%) to 465 (41%) votes.

Sharon desperately tried to prevent the vote, arguing that it would precipitate international pressure on Israel and tie his hands diplomatically. "Any decision taken today on the final [status] agreement is dangerous to the state of Israel and will only intensify the pressures on us," Sharon told those gathered at the Mann Auditorium, prior to the vote. His proposal was met with a chorus of boos.

Adoption of the resolution by the committee is in direct contradiction to the position expressed several times by the prime minister. On two separate occasions last year, Sharon publicly expressed readiness to back the creation of a Palestinian state.

The prime minister opened his remarks by criticizing what he called the "naivite" of prior governments in making agreements with Palestinian Authority Chairman Yasser Arafat.

"I did not shake Arafat's hand," the prime minister said, in a swipe at former prime minister Benjamin Netanyahu who spoke before him, and who held several meetings with the Palestinian leader during his term in office.

"There can be no peace with terror, with a man of terror," he said. "To make real peace for generations, we must beat the terror. There is no other way."

Sharon also reminded the crowd that a Likud-led government had already participated in a regional peace conference - in Madrid in 1991 - and that Benjamin Netanyahu was part of the Israeli delegation. That comment came as a result of Netanyahu's criticism of Sharon's idea of a regional peace summit.

Prior to Sharon's remarks, Netanyahu addressed the central committee, calling for Arafat to be exiled from the territories.

"We have no choice but to exile Arafat," Netanyahu said. He also referred to the Palestinian leader as "the engine that runs terror" and "the cause of one million shahids."

Netanyahu said that during his recent visit to the United States, the problem he experienced "was not to explain why Arafat should be exiled, but why we haven't exiled him."

Netanyahu said that a Palestinian state with or without Arafat at its head would threaten Israel. He also said that Arafat still intended to use a Palestinian state as the first step toward completely destroying Israel.

The former prime minister had to stop his remarks on several occasions due to disturbances by the crowd. Channel One reported that the disturbances were likely orchestrated in advance by the Sharon camp.

Netanyahu said that he supported an entity that allowed the Palestinians to govern themselves, but opposed granting them all of the rights that come with statehood - such as maintaining an army and acquiring weapons - because such a state would threaten Israel.

"Self rule - 'Yes'; state - 'No,'" Netanyahu said.

Earlier in the day, Likud leaders rejected a compromise proposed by Education Minister Limor Livnat, which was aimed at defusing the Sharon-Netanyahu showdown.