The year 1998 began as the old year ended – with increased Israeli settlement activity, a stalemate in the peace talks, and the PNA asking Washington to pressurize Israel into implementing the articles of its signed agreements instead of trying to bypass the three phases of employment as stipulated by the Hebron Agreement. In mid-January, Israeli soldiers and Palestinian policemen exchanged gunfire near Gush Katif during a large demonstration against the expansion of Jewish settlements. While the Israeli High Court legalized torture by ruling in favor of the use of force against Palestinian detainees by GSS interrogators, the PNA ordered Chief Justice Qusai Al-Abadleh to retire after he criticized the Palestinian judicial system and the Minister of Justice. In Jerusalem, the extremist Jewish settler group Ateret Cohanim began ‘rehabilitating’ 18 homes in the Moslem Quarter of the Old City and continued its efforts to purchase additional properties. The end of the month witnessed the first public statement by the PNA concerning the possible 4 May 1999 declaration of a Palestinian state.

During the first quarter of 1998 there were frequent clashes between Palestinians and the Israeli army: in Jerusalem, after Israel approved the construction of 132 housing units for Jewish settlers in Ras Al-Amud and the eviction of the Jahalin Bedouins from their encampment near Ma'ale Adumim; in Bethlehem, following the death of a Palestinian youth in Israeli police custody; in Qalandia Refugee Camp, after the army arrested six Arabs suspected of ‘violent actions’ during a nighttime raid; and in Hebron, after Israeli soldiers murdered three Palestinian workers at the Tarqumiya checkpoint and a 13-year-old boy, who was shot during the ensuing confrontations.

In March, faced with a new US proposal involving a lesser percentage of withdrawal, contingent on Israeli conditions, the Palestinians expressed their support for direct EU involvement and the EU-endorsed British initiative. Even a visit to Gaza by UN Secretary General Kofi Annan failed to bear fruits, and on 25 March, Netanyahu confirmed Palestinian fears by publicly opposing anything more than a 9% withdrawal from West Bank territory. The month ended with the 29 March assassination near Ramallah of Muhiyeddin Ash-Sharif, considered number two in Hamas’s military wing Izz Eddin Al-Qassam. Hamas member Imad Awadallah was accused by the PA of having committed the murder because of an alleged power struggle within the ranks of Hamas.

On 1 April, Israeli officials and police destroyed the Sumud Camp site in the Sawaneh neighborhood of East Jerusalem. On 15 April, Israel released the longest serving Palestinian administrative detainee, Ahmed Qattanesh, after five years and eight months. Also in April, Israel outraged observers worldwide when it denied for the first time since 1967 an international organization - the ILO - entry, preventing it from carrying out its annual mission.

In early May, two days of indirect talks in London resulted in President Arafat accepting but Israel rejecting the US proposal for a 13% redeployment from the West Bank. On 14 May thousands of Palestinians took part in the ‘One Million March’ to commemorate An-Naqba, the 50^th anniversary of the Palestinian ‘catastrophe’. The march resulted in lengthy clashes with Israeli troops that left ten Palestinians dead and more than 300 injured. Toward the end of the month, President Arafat faced his first no-confidence vote introduced by the PLC because of unanswered queries concerning budgetary and administrative reforms. Meanwhile, Ateret Cohanim was busy attempting to construct a new settlement near Herod’s Gate in the Old City of Jerusalem, having taken over one house and set up several mobile homes.

The settlement issue remained in the headlines throughout June: Ariel settlement was granted city status, the Elad settler group took over four homes in Wadi Hilweh/Silwan, and Israel approved a plan to expand Jerusalem by annexing more Palestinian land and connecting the city with Israeli settlements. The internationally condemned plan includes the annexation of Jewish areas to the west of the city, boosting Jerusalem's population by another 30,000 Jews, and calls for a ‘super municipality’ for the city and nearby West Bank settlements.

In early July, the UN General Assembly upgraded Palestine’s representation, allowing it to put its signature as ‘co-sponsor’ on proposed resolutions. Shortly afterwards, Israel announced that it would only accept the US 13% redeployment proposal on condition that the disputed 3% (Israel was insisting on 10% only) would be transformed into nature reserves supervised by both sides.

A few days after President Arafat announced the long awaited cabinet shuffle on 5 August, the PLC voted to approve the new cabinet, now with an additional ten ministers. The escape of Imad Awadallah from the Jericho Detention Center resulted in the first ever Palestinian-imposed curfew on Jericho. Another ‘first’ occurred on 30 August, when President Arafat approved the death sentence imposed one day earlier by the Gaza Military Court against the brothers Faris, Mohammed and Ra’ed Abu Sultan, who were accused of killing two brothers from the Al-Khalidi family on 27 August. Two of the Abu Sultan brothers were subsequently executed by police gunfire. Following the stabbing death of an extremist Jewish rabbi in the Tel Rumeida settlement in Hebron, Israel imposed a nine-day curfew on Palestinian residents of the H2 area, during which three Palestinian children died, including a three-month old baby and a newborn whose families were prevented from passing through the checkpoint on their way to rush them to hospital, and a 12-year old boy who was run over several times by a settler's car.

September began with the assassination by Israeli agents of Hamas fugitives Imad and Adel Awadallah. A few days later, an Israeli settler fired at a group of students from Beitunia, killing one youth; over 90 Palestinians were injured in the protests that followed. On 28 September, Palestine participated for the first time in the General Debate of the UN General Assembly. A day later, President Arafat met President Clinton and accepted for the first time the 13% withdrawal including a 3% nature reserve.

On 9 October, one day after US Secretary of State Madeleine Albright’s visit to the region, Israeli Prime Minister Netanyahu named cabinet hawk Ariel Sharon as Israel's new Foreign Minister. On 15 October, Israeli and Palestinian leaders convened at Wye Plantation near Washington in order to negotiate a final deal based on the US-proposed package. The deal that was signed on 23 October after nine days of negotiations – involving, at times, US President Clinton and Jordan’s King Hussein - includes a further Israeli withdrawal from 13% of the West Bank, the release of 750 Palestinian political prisoners, the opening of the Gaza airport and the safe passage between the West Bank and Gaza Strip, and specific Palestinian steps to halt anti-Israeli violence including a CIA-supervised plan to fight alleged terrorists and the removal of anti-Israel phrases from the Palestinian Covenant. Toward the end of October, a demonstration protesting the raiding of the Fatah office in Ramallah by PA military intelligence personnel turned violent when Palestinian policemen fired from rooftops, killing a 16-year-old youth. The tense situation worsened when, following a Hamas suicide attack on an Israeli convoy in Gaza, PA security forces arrested a large number of members and supporters of Islamic groups and put Hamas spiritual leader Sheikh Ahmed Yassin under house arrest.

At the beginning of November, Jewish settlers, protected by Israeli police, began leveling land in Ras Al-Amud, while tenders were invited for building the controversial Jewish housing project ‘Har Homa’ at Jabal Abu Ghneim. A few days later, the Jerusalem municipal elections resulted in Likud mayor Ehud Olmert being re-elected and the religious parties winning nearly half of the 31 seats of the City Council. Against the Palestinian consensus to boycott the elections as in previous years, there was for the first time a Palestinian candidate – Musa Alayyan from Beit Safafa – who ran in the elections. On 18 November, as Jewish settlers followed Ariel Sharon’s call "to move, run and grab as many hilltops as they can to enlarge the settlements because everything we take now will stay ours," the Knesset ratified the Wye Memorandum. Two days later, Israel carried out the first redeployment in the northern West Bank and released 250 prisoners, most of whom, however, turned out to be common criminals, which resulted in mass demonstrations in support of the prisoners and clashes with Israelis soldiers that left at least 57 people injured. On 24 November, the Palestinians were finally allowed to open Gaza International Airport.

The violence that prevailed throughout 1998 did not ease in December. On 2 December, an Israeli assailant stabbed to death father of six Usama Natsheh in Abu Tor, and at least ten people, including a priest and a nine-year-old boy were wounded in the subsequent demonstrations. The same day, Palestinian crowds ambushed an Israeli soldier near Beit El, and on 3 December, the Israeli Cabinet took a unanimous decision to suspend a further West Bank troop withdrawal, stipulated in the Wye Memorandum. The decision was heavily criticized by the EU, the UN and others. Two days later, Palestinian prisoners in Israeli jails began an open-ended hunger strike, and the violent confrontations that followed left a youth from Silwad dead and over 120 others injured. On 7 December, Nasser Ereqat was declared clinically dead, having been shot by Israeli soldiers whilst standing on the roof of his home in Abu Dis village near Jerusalem, and on 11 December, two youths were killed by Israeli troops during violent demonstrations in Qalqilya. On 14 December, during the first historic visit to the Palestinian areas by an American president, top Palestinian officials revoked, in the presence of US President Bill Clinton, parts of the Palestinian Charter that called for the destruction of Israel, while a new industrial park was inaugurated at the Karni Crossing, Gaza. The next day, the Clintons joined President Arafat and his wife Suha for a tree-decorating ceremony in Bethlehem. Three days later, during widespread Palestinian demonstrations protesting the US air strikes against Iraq, Israeli soldiers fired rubber bullets at protestors, killing 19-year-old Mohammad Daoud near Al-Bireh and injuring dozens more. Bringing the year to a gloomy end, the Israeli Knesset voted overwhelmingly on 21 December for early elections, signaling the collapse of the Netanyahu government and effectively freezing peace negotiations with the Palestinians.