You seemed to have missed the memo. Israel is not looking for peace for itself. Israel is trying to stop an enemy from attacking it. Part of the was you do that is to take out command and control assets. Part of taking out command and control is isolating them. Arafat is certainly less mobile for a while.
Plus in this case, Arafat is not was secure as he was when he had armored vehicles to move around in. Israel is probably not going to take out Arafat, but why wouldn't they do things to make it easier for any peaceful Palestinians to take him out. I think they did.
Finally the Israel's imposed an immediate cost on Arafat for the attacks today. I suspect Israel will continue to impose costs on Arafat directly any time their is an attack from now on.