Palestinian leader Yasser Arafat is set to sign an agreement that will give the Roman Catholic church an official footing in Jerusalem.

The Vatican and Palestinian officials have spent two years negotiating the deal. Palestinians were concerned at a similar agreement the Vatican made with Israel, which placed Catholic institutions in Israel and east Jerusalem under Israeli jurisdiction.

They feared that the Israeli agreement gave implicit recognition to Israel's claim to east Jerusalem, which it annexed in 1967. Israel and the Palestinians both believe they should control east Jerusalem.

Israel annexed the area in 1967 and says the entire city should become its capital while the Palestinians hope to have east Jerusalem as the capital of a Palestinian state. The Palestinians' agreement recognises Roman Catholic property in "areas where Israeli legislation is in effect" - a formula which includes east Jerusalem, where the Church of the Holy Sepulchre, one of Christianity's holiest sites, is located.

The agreement would also establish for the first time a legal framework to provide services and security to Catholic churches in Palestinian-controlled areas, a Palestinian official said.

Palestinian official Emile Jarjoui said the agreement would "regulate the relationship between the Palestinian Authority and the Catholic churches in Jerusalem". He added: "The agreement would also state the Vatican's position regarding Jerusalem, the peace process and Palestinian rights."

Previously, the Vatican has called Israel's annexation of east Jerusalem illegal and said it does not recognise Israeli sovereignty there.

The agreement comes ahead of a papal trip to the region next month, which will take in Jordan, Israel and the Palestinian territories.