Yasser Arafat has hinted that some Jewish settlers may be allowed to stay in the West Bank.
Palestinians had insisted that all Jewish settlements must be removed, but Mr Arafat told an Israeli TV station that the issue was "still under negotiation".
His statement has been overshadowed by the killing of a 55-year-old Israeli motorist in the West Bank and the death of a 21-year-old Palestinian in the Gaza Strip.
Mr Arafat has been toning down his rhetoric since Sunday when he accused Israel of waging "fascist military aggression".
He told the television interviewer: "I'm with the peace process. We are looking to achieve real peace between the two peoples".
Israeli Prime Minister Ehud Barak has said there will be no political contacts with Mr Arafat before the February 6 election.
But he noted the change and said the Palestinian leader's notions proved "how close we are to a peace accord" .
An opinion poll has given opposition leader Ariel Sharon a 20 point lead over Mr Barak.
Senior Israeli negotiator Gilead Sher told army radio that "international figures" were attempting to arrange a Barak-Arafat meeting this week.