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The announcement has been marred by the resignation of one of the Nobel peace prize committee members.
Kare Kristiansen objected to the honour being given to the PLO leader, whom he described as "too tainted by violence, terror and torture".
The award has also been overshadowed tonight by the bungled rescue of a kidnapped Israeli soldier from his militant Palestinian captors, which ended in the deaths of the captive, three of his kidnappers and one of his would-be rescuers.
It is the first time the prize has been divided among more than two named individuals and only the third time in the prize's 93-year history that a committee member has broken ranks publicly and quit.
The peace prize follows the historic handshake between the PLO leader and the Israeli Prime Minister on the White House lawn on 13 September 1993, marking an agreement to give the Palestinians limited autonomy in the Gaza Strip and the West Bank town of Jericho.
The Nobel Committee statement said the award was to honour a political act "one that called for great courage on both sides...By concluding the Oslo accords Arafat, Peres and Rabin have made substantial contributions to a historic process through which peace and cooperation can replace war and hate".
But the failed rescue attempt of Corporal Nahshon Waxman has served to highlight how frail the peace is in the Middle East.
The Israelis had accused Hamas of holding Corporal Waxman in PLO-administered territory. But after the PLO leader ordered a search and detained some 150 suspects, the soldier was eventually found in an Israeli-occupied area of the West Bank.
The kidnappers were demanding the release of their leader, Sheikh Ahmed Yassin, and 200 Hamas extremists being held in Israeli jails. Otherwise, they said, they would kill Corporal Waxman.
Mr Rabin refused to negotiate and - an hour before the captors' deadline expired - Mr Rabin ordered the rescue attempt.
He said afterwards: "I would happily give back the Nobel Peace Prize to bring back the lives of the soldiers who fell.
"Whoever wants to advance peace must fight the radical, murderous terrorists of Hamas and Islamic Jihad and the rejectionists because they are the murderers of peace."
Middle East experts were surprised at the inclusion of Mr Peres in the award. Although he and Rabin represent the same political party, they are bitter rivals. Both men have claimed the credit for last year's breakthrough.
Today's was the second Nobel peace prize awarded to peacemakers in the Middle East, the first being the 1978 joint award to Egyptian President Anwar Sadat and Israelia Prime Minister Menachem Begin.
The award was controversial and generated a great deal of criticism.
Adrian Hamilton of The Observer called it a "peace of opportunism rather than one of principle".
David Horovitz of the Financial Times said it was a decision based on "hopes of peace rather than peace itself".
Events since 1994 have tended to prove them right.
Prime Minister Rabin was assassinated in November 1995 by a right-wing Jewish extremist opposed to the peace process.
Yasser Arafat died in 2004.
Elections in January 2005 were won by former Palestinian Prime Minister Mahmoud Abbas. Under his leadership there have been tentative moves towards renewed peace talks despite continuing violence on both sides.
Sheikh Yassin was released in 1997. He was killed in an Israeli missile strike on 22 March 2004.
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