What should Arafat do?

The situation.
Three million palestinians scattered in refugee camps in Syria, Lebanon etc as well as in the west bank, many who were or descended from people who fled or were forced to leave Israel when it was formed who he feels he has to represent.
Utter poverty in the occupied territories
Ultra extremists in his general population and his own organisation
Continual Jewish settlement in the occupied territories
No real infrastructure left

Irrespective of who is to blame, any thoughts of what actually he could realistically do to bring a lasting peace?

Purely IMO, and with a timescale of several years, and in the full knowledge that this is a pipedream:

Condemn terrorism in no uncertain terms to his people (he’s started to go down this road, but only under pressure from Colin Powell). Beg for a ceasefire from other groups.

Ask Colin Powell, the UN (inc. Islamic members), and the EU for physical and financial assistance to impose order.

Ask the above parties for help to rebuild the Palestinian Authority infrastructure and security infrastructure (this is presupposing an Israeli withdrawal). Ask for massive financial assistance to kick-start commerce.

With the assistance of the parties above, illegalise Hezbollah and Hamas, and make the penalties for membership severe.

With the backing of the Arab League, go to the UN and start negotiating for the fulfillment of the various UN Security Council resolutions that have not been honoured by either side. This would involve Israeli withdrawal.

With Israel recognised by the Arab world as a legal entity, a Palestinian state would be established. This would involve removal of Israeli settlers from occupied territories (so one would imagine that Israel would have had to replace Sharon as head of state).

Allow refugees the right to settle in Palestine. Again, financial assistance would be needed.

Following the creation of a Palestinian state, and only if extremist factions would not get into power, call for democratic elections.

…Of course, this is supposing that Israel will behave itself, that extremists don’t continue their campaign of murder of innocent Israelis, and that he doesn’t get assassinated during this process.

Well, right off the bat, he can help combat the utter poverty by rooting out the corruption in his organization.

And Israel is and has been behaving itself quite well, all things considered.