Palestinians reject idea of state without army

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A week after President Barack Obama's address to the Muslim world, Mr Netanyahu said the Palestinian state would also have to recognise Israel as the Jewish state, essentially saying Palestinian refugees must give up the goal of returning to Israel.

With those conditions, he could accept "a demilitarised Palestinian state alongside the Jewish state".

The West Bank-based Palestinian government dismissed the proposal.

"Netanyahu's speech closed the door to permanent status negotiations," senior Palestinian official Saeb Erekat said.

"We ask the world not to be fooled by his use of the term Palestinian state because he qualified it. He declared Jerusalem the capital of Israel, said refugees would not be negotiated and that settlements would remain."

Mr Netanyahu refused to heed Mr Obama's call for an immediate freeze of construction on lands Palestinians claim for their future state.

Mr Netanyahu said: "I call on you, our Palestinian neighbours, and to the leadership of the Palestinian Authority: Let us begin peace negotiations immediately, without preconditions."

Calling on the wider Arab world to work with him, he said: "Let's make peace. I am willing to meet with you any time any place - in Damascus, Riyadh, Beirut and in Jerusalem."

He also said that Israel must recognise that millions of Palestinians live in the West Bank, and continued control was undesirable.

"In my vision, there are two free peoples living side by side each with each other, each with its own flag and national anthem," he said.

The Palestinians demand all of the West Bank as part of a future state, with east Jerusalem as their capital. Israel captured both areas in the 1967 Six Day war.