UNITED NATIONS, Sept. 7 (AP)--Palestinian leader Yasser Arafat has rejected a proposal by President Clinton for control of Muslim and Jewish holy sites in East Jerusalem, but Clinton refused to abandon his effort to bring about a Mideast peace accord.

Although Arafat's action dimmed already fading hopes for an agreement, Clinton directed his senior mediator, Dennis B. Ross, to keep talking to Israeli and Palestinian negotiators.

Arafat and Israeli Prime Minister Ehud Barak are still committed to concluding a settlement and ``they understand the time is short,'' Clinton said.

Arafat has reserved the right to proclaim Palestinian statehood without Israel's blessing on Sept. 13, though he has hinted the PLO's top policy-making body, which will make the final decision, is likely to delay such a proclamation until later this year.

Still, with no further meetings between Clinton and the two leaders scheduled--he met separately with Barak and Arafat on Wednesday--Clinton's No. 1 foreign policy goal was on the brink of disaster.

Arafat is holding fast for sovereignty over all of east Jerusalem, while Barak said Thursday he had ``made it very clear that no Israeli prime minister will ever be able to sign a document that gives up the sovereignty over places like the Temple Mount to the Palestinians.''

Arafat has likewise said that no Palestinian leader can surrender claim to all of east Jerusalem because of the uproar that would cause in the Arab and Muslim worlds.

Clinton's attempt to bridge the two positions would award sovereignty to the Palestinians over the two most sacred mosques on the Temple Mount in east Jerusalem and recognize Israeli sovereignty over the Western Wall, the remnant of the Jewish temple destroyed by the Romans, Palestinian sources said.

The wall around the Temple Mount and the enclosed area apart from the mosques would be placed under "divine sovereignty," said the sources, declining to be identified.

In practice, Jews and Muslims would continue to worship separately and, it is hoped, without conflict.

The site is known to Jews as the Temple Mount, home to ancient Jewish temples. is revered by Muslims al-Haram al-Sharif, or Noble Sanctuary, home to two mosques that mark the spot where the prophet Mohammed is said by believers to have ascended to heaven.

Even if Arafat accepted the proposal, east Jerusalem's future would still be undecided. At the Camp David summit in July, Barak offered the Palestinians local control of some neighborhoods and suburbs, but Arafat rejected the overture, insisting on sovereignty over the entire part of the city Israel won from Jordan in the 1967 Mideast war, and where large numbers of Jewish Israelis now live.

Still, the holy sites are probably the central issue, and the theory is settling disposition of them could be the breakthrough toward an accord on Jerusalem.

Without commenting directly on the proposal, Barak appeared somewhat receptive.

``I have told President Clinton that some of the ideas he has raised are beyond what we believe we can accept, but that if Chairman Arafat is ready to take Clinton's ideas as the basis for negotiations, we will be ready to contemplate it and to enter into such negotiations,'' Barak said.

He assailed Arafat's rigid stand, underscoring the fact the Palestinians would attain statehood with an agreement. ``With all due respect,'' Barak told reporters, ``when it comes to a moment when Arafat is on the verge of establishing his own state, it is not the right time to rewrite the history of the great three monotheistic religions.''

His refererence was to reports that in talks with Secretary of State Madeleine Albright, the Palestinian leader played down Jewish religious claims to the Temple Mount.

Barak is staying in New York through the weekend, but Arafat is expected to depart Friday to chair a Palestine Liberation Organization conference that is to set a date for proclaiming Palestinian independence.

Barak noted that Congress was scheduled to adjourn next month. ``Since there is a clear need to mobilize major sums of money in order to support such an agreement being glued together, I believe that time is running out in terms of being able to solve it,'' he said.

In Washington, Senate Foreign Relations Committee chairman Jesse Helms and nine other senators from both parties sent a letter to Clinton expressing deep concern over Arafat's ``continuing threats to unilaterally declare an independent state.

``Such a move would be a fundamental violation of the entire peace process,'' they said.

The senators added that a unilateral declaration would ``lead to a dramatic increase in tentions, including the risk of violence and bloodshed. There already have been threats made against Israeli settlements that would be located in territory for this Palestinian state.''

Signatories besides Helms were Lott, Brownback, Lugar and Mack from the Republicans. Daschle, Schumer, Feinstein, Dodd and Lautenberg were the Democrats.

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