U.S. officials yesterday rejected Palestinian demands for the release of captured guerrilla leader Mohammed Abbas, saying the only question was whether he should serve a life sentence in Italy or face new charges in the United States for masterminding the 1985 Achille Lauro hijacking.

Abbas, also known as Abu Abbas, led the Palestine Liberation Front splinter group in the 1980s and 1990s that orchestrated the takeover of the Achille Lauro, an Italian cruise ship. The terrorists singled out elderly American tourist Leon Klinghoffer because he was Jewish, killing him and then tossing him and his wheelchair into the Mediterranean.

The detention of Abbas in Baghdad by U.S. forces was cheered by the Klinghoffer family and their supporters, who immediately called for the criminal prosecution of Abbas in U.S. courts. Klinghoffer's daughters, Lisa and Ilsa, said in an interview that they have been frustrated for nearly two decades by the lack of action against Abbas, who has openly shuttled between Gaza and Iraq for years.

"We won't be happy unless he's brought here, tried here, and serves his entire sentence here," said Lisa Klinghoffer, 51. "He's been in our face all these years saying, 'Someone try to get me,' but nobody ever does. He's a murderous thug and nobody has done anything about it."

But the capture prompted an immediate legal dispute among the United States, Italy, Israel and the Palestinian Authority that could complicate U.S. efforts to resume Middle East peace negotiations. In addition, the detention raised anew the question of whether the United States could successfully prosecute a murder case against Abbas, who was not on the Achille Lauro when it was hijacked and has since called the action a mistake.

Italian officials said they would seek extradition of Abbas, who was convicted in absentia and sentenced to life in prison for the hijacking in 1986. Many Israeli leaders praised the arrest, and some said there was evidence that remnants of the PLF in Iraq may have helped provide financial support for Palestinian suicide bombers.

Palestinian leaders, however, said Abbas should be freed, arguing that an interim peace agreement in 1995 extends immunity to Abbas and other Palestinian militants for violence committed before the Oslo accords of 1993. The Israelis in 1996 allowed Abbas to enter Gaza, where he lived openly until returning to Baghdad in 2000.

Abbas's wife, Reem al-Nimr, told al-Jazeera television in Beirut that her husband should be let go because he was not part of Saddam Hussein's government and "is not a party to this war at all."

But State Department spokesman Philip Reeker said the interim agreement in 1995 only applied to criminal prosecution by Israel or the Palestinian Authority, and does not extend immunity from prosecution by the United States, Italy or any other third party. "The United States is not a party to that or any other amnesty arrangements regarding Abu Abbas," Reeker said.

Administration officials characterized the capture of Abbas as a major victory in the fight against terrorism, and said the case was proof of the cozy relations between Hussein and terrorist groups. Abbas, one of several prominent Palestinian fugitives given refuge by the Iraqis, is the only major international terrorist figure to be detained by U.S. forces so far in Iraq.

U.S. intelligence sources also said that U.S. Marines have discovered bomb-making material at a site described as a PLF faction training camp.

Intelligence officials said privately, however, that Abbas has not played an active role in terrorist activities for at least a decade, and the PLF is not believed to have any connection with Osama bin Laden or the al Qaeda network. Abbas has said in press interviews that the Klinghoffer killing was a mistake and that the hijacking should not have happened.

One senior administration official conceded that "it is unclear how much he's been doing" in terms of actively supporting terrorism, "but he's still associated with the PLF," which is designated a terrorist group by the State Department.

I. Michael Greenberger, a University of Maryland professor and Justice Department counterterrorism official in the Clinton administration, said the Abbas case "presents a legal quagmire and lots of legal difficulties." Greenberger said that while the United States has standing to deny Abbas immunity from prosecution, officials must also consider the impact of the case in the Arab world.

The Bush administration "can be vindicated . . . if he has been in active collusion with terrorists today; that would moot all the issues," Greenberger said. "This is a coup that they picked this guy up, but it does not support the theory that Iraq was crawling with terrorists. This was not the kind of guy that people were losing sleep over."

Abbas was captured during a U.S. raid Tuesday in south Baghdad, which, according to witness accounts, lasted two hours and included intense firefights between Special Operations forces and Abbas supporters. Abbas had attempted escape to Syria at least twice in the week before his arrest, U.S. officials said, but was turned away by the Syrians.

U.S. forces learned of Abbas's hideout through information supplied by the CIA, intelligence sources said.

Administration officials said the departments of Defense, Justice and State were engaged in intense discussions over how to proceed with Abbas and whether he could successfully be prosecuted under U.S. laws.

Military interrogators, meanwhile, will aim to glean as much information as possible from Abbas about the PLF and other terrorist groups, including anything he may know about al Qaeda operatives in Iraq and elsewhere, officials said. President Bush, Secretary of State Colin L. Powell and other administration officials said before the Iraq war that Hussein's government provided safe haven for an al Qaeda terror cell, but no members of that group have been reported captured so far.

The Justice Department dropped a U.S. arrest warrant for Abbas in the 1980s after the State Department concluded the evidence against him would probably not be admissible in U.S. courts, officials said. Authorities declined to say yesterday whether new evidence had come to light in connection with the Achille Lauro affair.

Staff writer Dana Priest contributed to this report.

Portraits of Mohammed Abbas, mastermind of the hijacking of the cruise ship Achille Lauro in 1985, are prominently displayed by Palestinians in a refugee camp near Sidon, Lebanon.