In a key, televised address outlining his government's policy toward the Middle East peace process, Netanyahu said that Palestinians must recognize that Israel is the legitimate nation-state of the Jewish people

"The heart of the (Middle East) conflict has always been the Arabs' refusal to accept the existence of the Jewish state," Netanyahu said. "The withdrawals that Israel has carried out in the past have not changed this reality."

"The territory in Palestinian hands must be demilitarised -- in other words, without an army, without control of airspace and with effective security safeguards."

"If we receive this ... demilitarisation and the security arrangements required by Israel, and if the Palestinians recognise Israel as the nation state of the Jewish people, we will be prepared for a true peace agreement, to reach a solution of a demilitarised Palestinian state alongside the Jewish state," he said.

Hard line on Hamas

Netanyahu called on the leadership of the Palestinian Authority to defeat Hamas Islamists who seized control of the Gaza Strip two years ago and continue to reject interim peace accords.

"They must decide between the way of peace and the way of Hamas," he said.

"The Palestinian Authority must impose law and order ... and overcome Hamas. Israel will not negotiate with terrorists trying to destroy it."

Netanyahu stressed that the Palestinian refugee problem must be resolved outside Israeli borders and that Jerusalem must remain the united capital of Israel.

On the issue of expansion in the West Bank, the Israeli leader said Jewish settlers should be given room for "natural growth".

"We have no intention of building new settlements or of expropriating land for new settlements," he said. "But, there is a need to allow settlers to lead normal lives, to allow mothers and fathers to raise their children like all families around the world."

President Barack Obama said Netanyahu's speech was "an important step forward" and accepted the remarks as an endorsement of his goal of a two-state solution to the Palestinian and Israeli conflict.

In France, Foreign Minister Bernard Kouchner said, "I can only welcome the prospect of a Palestinian state outlined by the new Israeli prime minister."

Angry Reactions

A spokesman for Palestinian President Mahmoud Abbas criticized the Israeli prime minister for "sabotaging" peace efforts with his demand that Jerusalem be the undivided capital of Israel and his refusal to allow Palestinian refugees into Israel.

"Netanyahu's remarks have sabotaged all initiatives, paralysed all efforts being made and challenged the Palestinian, Arab and American positions," said Nabil Abu Rdainah.

"This will not lead to complete and just peace."

Chief Palestinian negotiator Saeb Erekat agreed, saying Netanyahu's speech had unilaterally ended all negotiations by excluding key issues, such as security, from future talks.

"He will have to wait 1,000 years before he finds one Palestinian who will go along with him with this feeble state," Erekat said.

Meanwhile, a spokesperson from Hamas slammed Netanyahu's speech, saying it reflected a "racist and extremist ideology."

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Editor: Rick Demarest