President George W Bush said yesterday that it was "absolutely possible and necessary" for there to be an agreement on a Palestinian state by the time he leaves office next year.
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However, he disappointed many Palestinians when he showed no stomach for applying diplomatic pressure on Israel to remove the 420,000 Jewish settlers living on Palestinian land occupied in the 1967 war.
After meeting Mahmoud Abbas, the leader of the moderate Palestinian group Fatah, in the West Bank city of Ramallah, Mr Bush said: "In order for there to be lasting peace Abbas and prime minister Olmert have to come together and make tough choices and I'm convinced they will.
"I believe it's going to happen, that there's going to be a signed peace treaty by the time I leave office." Mr Bush is due to step down next January.
Later, speaking in Jerusalem, Mr Bush spelled out his vision for a future Palestinian state after two days of meetings with Israeli and Palestinian leaders.
It represented the most complete expression of the Bush administration's view on how to solve the Israeli-Palestinian conflict. While it will anger Right-wing Israelis who believe not one inch of the occupied territories should be given up, many Palestinians will feel deeply disappointed.
For decades Palestinian refugees who were driven out of their homes on land that became the new state of Israel in 1948 have kept alive the dream of one day going home.
Last night Hamas, the militant Islamist group, described Mr Bush's viewpoint as a "declaration of war".
While Mr Bush wrote a letter in 2004 saying Israel should not have to give back the large Jewish population centres in the West Bank, yesterday's statement went much further. ''There should be an end to the occupation that began in 1967," he said.
''The agreement must establish Palestine as a homeland for the Palestinian people, just as Israel is a homeland for the Jewish people.
"Achieving an agreement will require painful political concessions by both sides." He then went on to cover refugee compensation and to dash Palestinian hopes of recovery of all of the land lost in 1967 - in other words a return to the armistice line of 1949. Mr Bush said: ''While territory is an issue for both parties to decide, I believe that any peace agreement between them will require mutually agreed adjustments to the armistice lines of 1949 to reflect current realities and to ensure that the Palestinian state is viable and contiguous.
''I believe we need to look to the establishment of a Palestinian state and new international mechanisms, including compensation, to resolve the refugee issue."
Tight security arrangements were in force when Mr Bush paid a brief visit to Bethlehem to pray in the Church of the Nativity, the site where many Christians believe Jesus was born.
The test of success for Mr Bush's 48-hour visit to Israel and the occupied Palestinian territories will come only after he leaves for Kuwait today and negotiators from both sides try to sit down to start dealing with final settlement issues.
Attempts to restart meaningful talks failed after a meeting hosted by Mr Bush in Annapolis in November and it is feared once the presidential entourage leaves, talks could remain blocked.
