Israeli Prime Minister Benjamin Netanyahu, in a major policy speech, accepted the creation of a Palestinian state but only if it was demilitarized.
Palestinian leader Mahmoud Abbas's spokesman said his comments challenged Palestinian, Arab and US positions. But the US said, Mr. Netanyahu's stance was an "important step forward".

In a landmark speech, Mr. Netanyahu said the Palestinians must accept Israel as a Jewish state. He said, a Palestinian state must have no army, no control of its air space and no way of smuggling in weapons, and cooperating with Iran or "Khezbollah".

Mr. Netanyahu suggested to start negotiations with Palestinians immediately and without any pre-conditions. "We want to leave in peace with you, as with kind neighbors," Israeli prime minister said. His speech provoked anger among Palestinian officials BBC reports.

Palestinian leader's spokesman Nabil Abu Rdainah said: "Netanyahu's remarks have sabotaged all initiatives, paralyzed all efforts being made and challenges the Palestinian, Arab and American positions," Reuters news agency reported. Palestinian negotiator Saeb Erekat said the speech "closed the door to permanent status negotiations".

"He declared Jerusalem the capital of Israel, said refugees would not be negotiated and that settlements would remain." Mr. Erekat added: "The peace process has been moving at the speed of a tortoise. Tonight, Netanyahu has flipped it over on its back."

But the White House called the policy outline an "important step forward", as did French Foreign Minister Bernard Kouchner. A White House statement said Mr Obama "believes this solution can and must ensure both Israel's security and the fulfillment of the Palestinians' legitimate aspirations for a viable state, and he welcomes Prime Minister Netanyahu's endorsement of that goal".