One has to wonder why Arafat would accept now what he rejected earlier, assuming the January proposal did propose a joint city, and Barak accepted it? Did he Monkeyshine?. I believe the offer prior to January put the Arab part of Jerusalem in the proposed Palestinian state, but I could be wrong.
Yes, one must wonder. As is par for this region, some Arabs are causing lots of problems, but other Arabs are needed to fight them, so Israel gets the blame.
To gain some leverage in the PR war, Israel should re-propose the basics of Barak's plan, but add some conditions: full recognition and exchange of embassies with Kuwait, Saudi Arabia, UAE, Oman, Yemen, Morocco, & Algeria. It should also add removal of all discriminatory UN motions, and insist on participation in the revolving seats of the Security Council (Israel is the only nation that is not allowed to serve on the Security Council). It should also insist that the PA become a Constitutional Democracy. It will be hard for the west to argue in favor keeping Palestine a dictatorship, and it will force the west to confront our biggest demon -- which has been siding with monarchies, dictators and oppressive rulers to gain economic and political expediency. Human rights such as universal sufferage, freedom of worship, freedom of speech and assembly are ideals we cherish, and the lack of them in the Arab world is Israel's biggest problem of all. Israel has a lot of leverage, IMHO, if she makes this demand in exchange for land/peace.
Barak's plan included soveriegnty over Jerusalem for Israel, with Palestinian administrative control over east Jerusalem. They could make a case to remove this from the proposal given the risks to security as seen from all the suicide bombers over the year, but imho there is no alternative to a Palestinian state. It's now just a question of what kind of state... and in this Israel has a lot of leverage.