WASHINGTON (AP) _ A top PLO official proposed that Jerusalem be established as the capital of Palestinian and Israeli states, with a joint council to run the city.

Nabil Shaath, a senior adviser to Yasser Arafat, said Friday that Jerusalem's future is the most difficult problem facing Israeli and Palestinian negotiators in devising a final settlement.

But, he said, it's not impossible. ``One can run Jerusalem as an entity,'' Shaath said at a news conference at The Washington Institute, a private research organization.

Israel took control of east Jerusalem from Jordan in the 1967 Six-Day War, then made the city its united capital. Even the most dovish Israelis insist that Jerusalem remain the Jewish state's undivided capital.

Shaath's proposal would keep the city united but would give Palestinians a share in running it. At the same time, the Palestinians would acquire statehood and establish its capital in the city that is holy to Jews, Muslims and Christians alike.

Israel's ruling Labor party recently scrapped its opposition to a Palestinian state. Its hold on power will be tested in national elections next Wednesday.

Shaath, who has key posts in the Palestinian Authority that runs Gaza and part of the West Bank, sharply criticized Prime Minister Shimon Peres' government for sealing to border as a security measure.

He said the ``suffocating siege'' wrecked the Palestinians' economy and threw those with jobs in Israel permanently out of work. The Israelis imported 220,000 workers from Asia and eastern Europe to replace them, Shaath said.

He praised the Peres government overall and said if it ``continues in power there is a better chance for peace'' than if the Likud opposition led by Benjamin Netanyahu is elected.

If Peres loses, Shaath said, ``we are going to have very serious problems.'' But, he added with a smile, ``It is not the end of the world.''