Netanyahu says Israel ready for a Palestinian state – with conditions

But a future Palestine must be 'demilitarized,' and the Jewish settlements won't be halted, Israel's leader says.

Israeli Prime Minister Benjamin Netanyahu said for the first time that he would agree to the creation of a Palestinian state, but conditioned that on a US guarantee that the state be demilitarized and that the Palestinians recognize Israel as the state of the Jewish people.

"I told President Obama in Washington that if we can agree on the substance, the terminology won't constitute a problem," Netanyahu said in what was billed as a seminal foreign policy speech.

"If we get this guarantee for the demilitarization and the necessary security arrangements for Israel, and if the Palestinians recognize Israel as the state of the Jewish people, we will be ready for a real peace arrangement to reach a solution of a demilitarized Palestinian state alongside the Jewish state."

The speech, delivered at Bar Ilan University just outside of Tel Aviv, was an attempt to better harmonize Mr. Netanyahu's foreign policy with Mr. Obama's twin calls for the creation of a Palestinian state alongside Israel and for a freeze in settlement activity.

Biggest US-Israel rift in decades?

Netanyahu's reluctance until now to agree to either of the points has prompted the most public diplomatic rift between Israel and the US in nearly two decades. The Israeli prime minister reiterated his rejection of Obama's call for a halt in settlement activity, reflecting his need to mollify right-wing ideologues in his coalition who reject any form of territorial compromise.

"There is a need to allow the residents to live normal lives," he said, defending continued construction in already existing West Bank settlements. "The settlers are not our enemies."

Analysts say Netanyahu's concession on Palestinian statehood is likely to annoy many of his right-wing coalition partners, but the speech wasn't far reaching enough to prompt a split with the ideologues. What remains to be seen is whether it will satisfy the US administration enough to ease differences over settlement construction.

Not yet willing to freeze settlements

"Netanyahu has gone as far has his coalition limitations will allow him to go; and for some in his coalition, perhaps even too far," says Yossi Klein Halevi, a fellow at the Shalem Center, a center–right institute in Jerusalem. "He made it clear in his speech that settlement expansion is not a priority for this government. At the same time, he has also made it clear that this will not be the first Israeli government to build in the settlement blocks."

Netanyahu said that he's ready to resume negotiations with the Palestinians without preconditions, but his insistence on continuing settlement building will run afoul of demands from Palestinian President Mahmoud Abbas that Israel commit to a freeze.

The question now is whether the speech went far enough to heal the rift with the Obama administration.

"The Prime Minister said enough on the two-state solution that will enable the Obama administration to accentuate the positive," says David Makovsky, a fellow at the Washington Institute. "As such, it could take the tension off we've seen in the last few weeks, but the settlement issue will remain a stumbling block because there is not yet a meeting of the minds."