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JERUSALEM (AP) _ Prime Minister Ariel Sharon's defeat in a Likud party vote rejecting a Palestinian state first appeared to be a humiliating challenge to his leadership of the party. But many now view it as a boost _ turning Sharon into a voice of moderation and shoring up his popularity with mainstream Israelis.

``Ariel Sharon made his choice last night. He opted for the world central committee over the Likud Central Committee, and the viewers at home over the party activists in the hall,'' the Yediot Ahronot daily said Monday.

Sharon's popularity has soared since he began incursions into Palestinian-controlled territories in the West Bank to root out militants. A poll released April 12 showed 59 percent of Israelis were satisfied with his performance, a sharp increase from his earlier approval ratings.

At the same time, polls show Israelis also support peace proposals that might break the deadlock with the Palestinians _ with one survey showing a majority for the recent Saudi peace initiative, even though the question stated it would mean practically a return to Israel's pre-1967 borders.

But within his party, Sharon faces a serious challenge from the right, led by former Prime Minister Benjamin Netanyahu, who hopes to return to power in the next election, slated for 2003.

Though Likud has long opposed creation of a Palestinian state, Sharon has publicly accepted the idea and he hoped to keep the issue off the agenda at Sunday night's meeting, out of fear of international embarrassment and concern it could tie his hands politically in dealings with the Palestinians.

Netanyahu pushed for a vote, saying any Palestinian state ``would be a terror state, meant to destroy the State of Israel.'' The 2,700-member central committee strongly supported him, and a visibly upset Sharon told the delegates he would continue to lead Israel toward peace and security, and then quickly departed.

Palestinian leader Yasser Arafat said the vote signaled ``the destruction of the Oslo accords,'' referring to the interim peace agreements he reached with Israel in the mid-1990s.

Foreign Minister Shimon Peres, an architect of the Oslo accords and a longtime champion of peace, called the vote ``words, words, words, words, empty of content.''

By Monday afternoon, Sharon's supporters were presenting him as a courageous man unafraid of political embarrassment in the interest of the greater good.

``Yesterday there were two people on the stage, one who is willing to suffer losing and humiliation because he is fighting for a position he thinks is the correct position for the state of Israel ... and opposite him was a person who will stoop to anything for a two-day political gain,'' said Sharon aide Eyal Arad.

``Even those who don't agree with (Sharon) can see that he deserves respect,'' Arad said.

On Sunday night, Sharon appeared to be aligning himself with the majority of Israelis, 54 percent of whom favor a Palestinian state, according to the April 12 poll in the Maariv daily. The poll surveyed 590 Israelis and had a 4.5 percent margin of error.

Typical of Israelis' acquiescence with the idea is Avi Revach, a 37-year-old Likud supporter who said Monday that for all his reservations about it, ``there must be a Palestinian state.''

Sharon also appeared to be sending a message to the world community that he is more flexible than the man who wants to replace him.

But at the same time, Sharon remains a staunch supporter of Jewish settlements in the West Bank and Gaza.

A report released Monday by an Israeli human rights group said a web of settlements hemming Palestinian areas of the West Bank into disconnected pockets of land were greatly complicating prospects for Palestinian statehood. A nine-month study by B'Tselem said the settlements control about 40 percent of the West Bank's territory, while housing about 1 percent of its population.

President Bush has called for a Palestinian state, the European nations all support the idea and Saudi Arabia is promoting a peace initiative that would give the Palestinians a state.

Given this international climate, Sharon decided ``to suffer a tactical loss in this committee, but to continue to be characterized as a sovereign, pragmatic diplomat,'' said political commentator Hanan Crystal. ``This will help him among the wider public.''

And it will not really hurt his ability to negotiate, since Israeli prime ministers have a long tradition of ignoring their parties' opinions, said political commentator Yaaron Dekel.

``I wouldn't say (the vote) is meaningless, but I would say it was not too meaningful.''

There is some risk to Sharon, however.

Since Israel discarded the direct election of prime minister _ in effect for three elections from 1996 to 2001 _ Sharon needs to be re-elected party leader to even contest the next elections, scheduled for November 2003.

But Sharon need not worry that his party will abandon him if he retains widespread popularity, Dekel said.

``They won't change a winning horse,'' he said.