President Bush says he is encouraged by the Palestinian arrests of 16 Hamas members in response to Tuesday's bomb attack near Tel Aviv. Mr. Bush says what happens to those arrested will be a key test for Palestinian leaders.

The President says only time will tell whether Palestinian leader Yasser Arafat is serious about stopping the violence. Mr. Bush says it is a positive development that the Palestinian leader has spoken out, in Arabic, against terrorism.

"That is good. That is a positive development. Now it is up to Chairman Arafat to perform, to keep them in jail," he said. "Arrest them and keep them in jail. In order for there to be peace, we must rout out terror."

White House spokesman Ari Fleischer says the administration expects Palestinian leaders to deal seriously with the Hamas suspects. "If people are engaged in murder," Mr. Fleischer said, "they should be held accountable, and a good government would arrest them and take it seriously."

President Bush rejects Israeli characterizations of his Tuesday meeting with Prime Minister Ariel Sharon. Israeli officials say Mr. Bush agreed to sideline Mr. Arafat in favor of more moderate Palestinian leaders as part of an effort to reform the Palestinian authority.

"What is an accurate reflection of my opinion is that Mr. Arafat has let the Palestinian people down. He has not led, and as a result, the Palestinians suffer. My heart breaks for the Palestinian moms and dads who wonder whether or not their children are going to be able to get a good education and whether or not there is going to be a job available for their children," he said. "And one of the things we did talk about was how to put institutions in place so that a potential Palestinian state can be a peaceful neighbor with Israel."

The president says those reforms of Palestinian institutions include an economic system promoting rule of law, rooting-out corruption and a unified security force held accountable for arresting terrorists.

President Bush is sending CIA Director George Tenet back to the region to help organize that unified security force a plan which appears to have the backing of U.S. allies in the Arab world.

White House officials say no one in the Bush administration is trying to tell Palestinians who their leaders should be. While they make it clear Mr. Arafat has yet to earn the president's trust, they recognize that he is the Palestinian leader and must be part of the dialogue toward peace.