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WASHINGTON, May 6 (Reuters) - Israeli Prime Minister Ariel Sharon began talks in Washington on Monday, hoping to persuade the United States to freeze Palestinian President Yasser Arafat out of Middle East peacemaking and push for Palestinian Authority reforms.

U.S. President George W. Bush, who meets Sharon on Tuesday, reiterated his disappointment with Arafat for not reining in militants but did not echo demands the Israeli prime minister Sharon has made for the Palestinian leader to be replaced.

"He has disappointed me. He must lead. He must show the world that he believes in peace," Bush told reporters during a visit to an elementary School in Southfield, Michigan.

Bush has laid out what he calls his own vision for a peaceful Middle East, including an end to conflict and an independent Palestinian state, and the Sharon visit comes amid a flurry of high-level meetings to end the current crisis.

"In order to achieve peace all parties, the Arab nations, Israel, Chairman Arafat and the Palestinian Authority, must assume their responsibilities and lead," said Bush, who has angered Arabs by calling Sharon "a man of peace."

Secretary of State Colin Powell said before meeting Sharon on Monday he expected to discuss a 100-page report which Israel says shows Arafat used millions of dollars in U.S. and European Union donations to fund terrorism.

The Palestinian Authority denies that allegation.

Powell declined to discuss details after the 45-minute talks, telling reporters only, "We had a very good meeting."

Sharon later held talks with Defense Secretary Donal Rumsfeld at the Pentagon expected to touch on the U.S. global war on terrorism and speculation it could be widened to Iraq.

At a news conference at the Israeli Embassy, a Cabinet minister who accompanied Sharon to Washington called for an end to Arafat's rule and distributed an Israeli report alleging Saudi money paid to Palestinians encourages terrorism.

"As we see it now, Arafat should be replaced by different forces within the Palestinian Authority with whom we will be able to negotiate," Education Minister Limor Livnat said.

The Israeli report said Saudi Arabia gave $135 million over the past 16 months to Palestinian charities for distribution to the families of Palestinians killed during the current uprising against Israeli occupation.

Col. Miri Eisin of Israeli military intelligence said at the news conference the data came from documents seized during the West Bank offensive that Israel launched on March 29 after suicide attacks killed dozens of Israelis.

"The captured documents demonstrate that the Saudi support was not only of a humanitarian religious nature, as Saudi spokesman in the United States claim," the report said.

"The documents clearly unveil that Saudi Arabia transferred ... large sums of money in a systematic and ongoing manner to families of suicide terrorists, to the Hamas organization and to persons and entities identified with Hamas."

Hamas, which has carried out dozens of suicide attacks in Israel, maintains an extensive network of charity institutions in the West Bank and Gaza Strip.

Release of the report followed what many in Israel see as a recent warming of U.S.-Saudi relations after Saudi Crown Prince Abdullah proposed a plan for Israeli-Arab peace based on Israeli withdrawal from all land occupied in the 1967 Middle East war.

"They (the Saudis) have to make up their mind if they want to be part of the peace coalition or the war coalition," Livnat said.

She stopped short of accusing the kingdom of directly supporting terrorism, a charge that could have rankled the Bush administration on a day when Powell met Saudi Foreign Minister Prince Saud al-Faisal.

The United States, under pressure from the European Union and moderate Arab states including Saudi Arabia to become more engaged in the conflict, is making preparations for an international Middle East conference in the next few months.

Faisal reserved judgment on the usefulness of the conference, proposed by the United States, Russia, the European Union and the United Nations.

"The conference or meeting is not an objective in itself. It depends on what that meeting includes," he said.

Sharon has said he was bringing a "serious" plan on how to reach peace in the Middle East."

He gave no details, but Israeli political sources said it mirrored his previous proposal for a long-term interim arrangement that would include Israeli security buffer zones in the West Bank and leave Jewish settlements in place.

Palestinians have rejected those ideas as falling far short of their aspirations for a state. 

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