Because Arafat is such a rabid liar, there is some question as to whether or not Arafat is actually a relative of the Mufti, or if he just adopted a name to fake a relation to him.
To my lights, the latter says more about Arafat's despicable nature than the former.
It's not proven that he is his nephew, but it wouldn't surprise me one bit. I've always assumed that he actually is. The two seem like they are cut from the same cloth. Regardless, no doubt "rumor" status for this notion is most beneficial to Arafat, because he can alternately embrace it or distance himself from it as he deems appropriate.
Here's a good Arafat link.