The agreement, which came little more than a month before Pope John Paul II's scheduled pilgrimage to the Holy Land, March 20-26, is the first of its kind between the Vatican and an Arab entity.
"Unilateral decisions and actions altering the specific character and status of Jerusalem are morally and legally unacceptable," a key section of the agreement says in a clear reference to Israel.
At a 15-minute private audience after the signing ceremony, Yasser Arafat, president of the Palestinian National Authority (PNA), briefed Pope John Paul II on "the most recent developments in the peace process" and expressed "concern over the present situation," Vatican spokesman Joaquin Navarro-Valls reported.
Israel's negotiations with both the Palestinians and Syria have stalled. Arafat said he urged John Paul to add Jericho, one of the first cities to be governed by the PNA, to the itinerary of his pilgrimage next month to Jordan, Israel and the PNA-administered territory.
Navarro-Valls said the pope "agreed on the spot."
"God bless the Palestinian people," the Roman Catholic pontiff said at the end of the audience.
Zvi Tal, spokesman for Israel's embassy to the Holy See, expressed "dismay" at the agreement. He said while the Vatican's position was well-known, the signed accord amounted to interference in ongoing peace negotiations between Israel and the Palestinians.
The Basic Agreement between the Holy See and the Palestine Liberation Organization "regulates some questions of a juridical character concerning the presence and the activity of the Catholic Church in the territories of the Palestinian Authority," the Vatican spokesman said.
In the 12 articles, the PLO affirms its "commitment to uphold and observe the human right to freedom of religion and conscience" and the Vatican its respect "for the followers of other religions." The PLO also recognizes "the rights of the Catholic Church in economic, legal and fiscal matters."
The agreement is intended to serve as the basis for future accords with an independent Palestinian state. The Vatican and the PLO established official relations Oct. 26, 1994, following the Vatican's recognition of Israel in December 1993.
A third of the preamble concerns the long-disputed status of Jerusalem and its holy places sacred to Jews, Christians and Muslims.
The document reiterates the Vatican's demand, rejected by Israel, for an internationally guaranteed "special" status for Jerusalem to safeguard the holy places, ensure access to them and preserve "the proper identity and sacred character of the city and its universally significant religious and cultural heritage."
"An equitable solution for the issue of Jerusalem, based on international resolutions, is fundamental for a just and lasting peace in the Middle East," it says.
Israel declared Jerusalem to be its indivisible and eternal capital after annexing Arab East Jerusalem in the 1967 Middle East war. The PLO wants to establish its capital in East Jerusalem and has sharply criticized recent Israeli construction in the area.
Arafat, speaking in Morocco on Monday, appealed to Muslim states for funds to save East Jerusalem from "cancerous Judaization."
The agreement's preamble calls for a "regime of status quo" in the city's holy places, and Article 4 says, "The regime of the status quo will be maintained and observed in those Christian holy places where it applies."
The status quo has been threatened in Nazareth as well as in Jerusalem in recent months. Catholic and other Christian leaders have hotly protested Israel's approval of plans for construction of a mosque in Nazareth beside the Basilica of the Annunciation, which stands on the site of what tradition holds is the spot where the angel Gabriel announced to the Virgin Mary she would conceive Jesus.
The agreement was signed by Monsignor Celestino Migliore, the Vatican's undersecretary of state for foreign relations, and Emile Jarjoui, a member of the PLO Executive Committee, who led the PLO delegation in two years of negotiations.
On his pilgrimage to the Holy Land to celebrate the start of the third millennium of Christianity, the 79-year-old John Paul is scheduled to visit Mount Nebo in Jordan, Palestinian-ruled Bethlehem, the Mount of Beatitudes in northern Israel, Nazareth and Jerusalem.
The pope also will travel to Egypt Feb. 24-26 to visit the traditional site of Mount Sinai.