Those of us observing the aftermath of Arafat's passing got our first taste of what is to come when Mahmoud Abbas, acting head of the Palestinian Authority, was nearly assassinated while he and Muhammad Dahlan were visiting Arafat's mourning-tent. Two bodyguards were killed and several mourners wounded. The attackers were apparently from the al-Aksa Martyrs Brigades (recently renamed the Arafat Martyrs Brigades).
Abbas had announced plans for an election to be held on January 9. That date will mark a fundamental breakdown in the Palestinian government, no matter what happens, for the simple reason that any free and fair election will almost certainly be won by Hamas, the local branch of the Muslim Brotherhood. Hamas has a great deal of popular support in the PA, and is hostile to the PLO and utterly opposed to Israel's existence.
Abbas is tremendously unpopular even among the PLO. He is tagged as an American lapdog, and is rumored to have poisoned Arafat himself. Even before the election he faces the opposition of several prominent PLO members, notably Farouk Kaddoumi, who publicly rejected the Oslo Accords and remained outside of the Territories in protest. Assuming Abbas stays alive and in power long enough to reach the January 9 elections, he is faced with several bad options if Hamas looks like it will win:
1. Accept the outcome of the elections and transfer power peacefully.
Given past history, the chances of this happening are nil. Not only does Abbas want power, but if Hamas ever does take over the leadership Israel will be forced to crush the PA once and for all. Israel cannot afford to let Hamas, who didn't even go through the charade of negotiations as did the PLO, gain international legitimacy in any way.
2. Declare Hamas an invalid participant in the elections.
Political (and literal) suicide.
3. Declare a state of emergency and pospone the elections for trumped-up reasons.
Almost as bad as option 2.
The most likely scenario is that we will see a rash of assassinations of leaders on all sides; I doubt Abbas will live long, and eventually things will settle down with a strong dictator taking power. That's the "best-case" scenario. The other thing we could see is all-out civil war between Hamas and the PLO, with street battles and casualties in the thousands. That's assuming that Iran doesn't begin thinking that it could take control, and bringing their proxy Hizbullah into the mix.
What can America and Israel do about it? Not much. The man they would prefer to see in power, Abbas, is a condemned man. I believe the most prudent course of action would be to stay out of the way and hope the fighting ends quickly.