Murdering him would martyr him. That's not a good idea. Israel could not possibly fail to know that, so they can't be serious. Unfortunately, discussing the option is likely to endear him to the Arabs with the disadvantage that he's still alive...
Arafat needs to be discredited in the eyes of the Arab world, or at least in the eyes of the Palestinian Arabs. Why is this? Democracy in Palestine is hard to achieve because Arafat is loathe to relinquish control. He also stands for throwing out the Israelis, implicitly if not explicitly, which is why Israel don't like him. They've been trying to sideline him for years, with uncertain success.
Wade.