The issue of Jerusalem Arabs voting in the elections has immense political repercussions because it could signal whether Israel has de facto sovereignty over the united city which legally has been a part of Israel since 1967.
Ra'anan Gissin, spokesman for Prime Minister Ariel Sharon, announced last week that allowing Jerusalem Arabs to vote for Hamas candidates would be like "letting a Trojan horse into our city. There is no reason whatsoever we should assist a terrorist organization on the ballot to gain victory."
The PA responded by threatening to cancel elections, and the Arab League has lent its support by stating that the Israeli position is an attempt to solidify a claim that all of the capital belongs to Israel. The PA demands that Jerusalem become the capital of a new Arab state in Israel.
Following the calls from American government officials, an aide to Prime Minister Sharon said the government "will contemplate" allowing five polling stations to open, according to the French news agency AFP.
"Israel has no intention of giving [PA chairman] Mahmoud Abbas an excuse to cancel the election because he fears a victory for Hamas and allow him to accuse us before the international community of being responsible for his decision," the aide said.
He added that the government will delay a final decision until the PA "definitely confirms that elections will be held on the scheduled date."
However, the PA is likely to insist that elections will take place as scheduled only if Israel backs down, although there is no guarantee that they will not be postponed at the last minute.
Abbas fears that Hamas terrorists and rival Fatah party elements will leave him with a minority government. Abbas was elected chairman in elections last year after the death of Yasser Arafat.
Due to divisions within Abbas' Fatah, current PA prime minister Ahmed Qureia has announced he is quitting the race to form a new party named after former PLO leader Yasser Arafat. Qureia claims however, that he is leaving the race because of Israel's hard-line position against voting by Jerusalem Arabs.