Israel is a sovereign nation, and can attack anyone it chooses to. The U.S. doesn't have to "let" them do anything.
first, they *are* attacking. there are Israeli tanks in the streets in palestinian areas, Arafat's HQ has been attacked by missles, and over 1000 palestinians have been killed so far. but one argument for the U.S. (and all western allies) "pressuring" them not to start a full-out slaughter of the palestinians or declaring an official war is that they might draw the wrath of the entire arab world, a billion strong. given that Israel only has around 15 million people, the U.S./western world would have to decide whether to get involved to protect them or not, and if it did, that might start WWIII, west-vs-arab. if we go to full-scale war with the arab world, the WTC disaster will look like a prank compared to the terrorism that would be unleashed, in the US, Europe, and Israel.
3 reasons not to kill Arafat: he is a de facto "head of state," it might incite the whole population into a frenzy, making things worse, and it might allow some of the more fundamentalist (ie, more fanatical, more anti-Israel) groups to gain power if he's gone, which again would be much worse for Israel.