Israel has declared Yasser Arafat an "enemy" and sent tanks and troops into his compound in the West Bank town of Ramallah.
Israeli troops have seized at least two buildings, exchanging fire with Palestinian security guards, wounding 13.
A building next to Arafat's office caught fire in the attack but he was not harmed, according to aides.
The raid of the compound is the closest Israeli forces have come to the Palestinian leader in 18 months of fighting.
It is part of a major military operation in response to Palestinian terror attacks which have killed 27 Israeli civilians in three days.
As the fighting raged, a defiant Arafat told Al Jazeera, the Arab satellite television channel: "They want me either under arrest or in exile or dead, but I am telling them, I prefer to be martyred.
"They are shelling the headquarters and we have some people who are injured, and they can't move them to the hospitals."
Mustafa Barghouti, head of the private Palestinian Medical Relief Services, says no deaths have been reported inside the compound, but four Palestinians were killed in the streets of Ramallah.
In Jerusalem, Israeli Prime Minister Ariel Sharon told a news conference Israel now considered Arafat an enemy and he would be completely isolated "at this stage".