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Palestinians have proposed a final peace settlement in which they offer to cede West Bank territory containing large blocs of Jewish settlements to Israeli sovereignty, an Israeli newspaper reported today.

The newspaper Ha'aretz said the plan was unveiled by Palestinian leader Yasser Arafat during talks last week in the United States.

Palestinians denied the report. Nabil Amr, an adviser to Arafat, said it was "woven by a fertile imagination."

But a U.S. official, speaking on condition of anonymity, said the report had some elements of truth.

Under the reported plan, the Palestinians propose that Israel hand over the West Bank to Palestinian rule. Israel, however, would keep large settlement blocs.

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