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zoomBut he also said the Palestinians must recognise the Jewish character of Israel, a condition Palestinian president Mahmud Abbas has long rejected, and ruled out a halt to all settlement activity as demanded by the United States.
"If the Palestinians recognise Israel as the state of the Jewish people, then we arrive at a solution based on a demilitarised Palestinian state alongside Israel," Netanyahu said.
"The Palestinian territory will be without arms, will not control air space, will not be able to have arms enter, without the possibility of striking alliances with Iran or (the Lebanese Shiite militia) Hezbollah."
Netanyahu also ruled out a complete stop to settlement activity in the occupied West Bank - which the Palestinians have said is a condition for relaunching negotiations - and said Palestinian refugees would not be resettled inside Israel's borders.
"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 Palestinians recognised Israel as a state in 1993 as part of the Oslo accords but have refused to recognise it as "Jewish" as doing so would effectively mean giving up the right of return for Palestinian refugees, a key Palestinian demand since Israel was created in 1948.
The Palestinians slammed the speech, saying it was aimed at sabotaging peace efforts.
"This speech torpedoes all peace initiatives in the region," Abbas spokesman Nabil Abu Rudeina told AFP.
"It hobbles all efforts to save the peace process, in a clear defiance of the US administration."
The speech was billed as a response to Obama's address to the Muslim world 10 days ago in which he reiterated Washington's "unbreakable" bond with Israel but also said the Palestinian situation was "intolerable."
Obama has vowed to aggressively pursue a two-state solution and in recent weeks Washington had ramped up pressure on Israel's new government to endorse the idea of a Palestinian state and halt all settlement activity.
The blunt words to Israel from Obama's administration have raised fears in the Jewish state that main ally Washington may ease its support as it tries to improve its relations with the Muslim world.
It has also put Netanyahu in a difficult position, as his heavily right-wing 10-week-old government could collapse if he gives in to too many of Washington's demands.
"It was a brilliant speech but it had one miserable phrase that laid the cornerstone for the creation of a state of Palestine," Likud MP Danny Danon said following the address.
"I will do everything in my power in parliament to prevent this from happening."
Former US president Jimmy Carter told the Israeli Haaretz daily on Sunday that Israel risked a head-on collision with Washington over the settlements.
But a Western diplomat who spoke on condition of anonymity said the speech "is certainly encouraging and gives us a lot of work with."
"I think everyone understands Israel's concerns and the demand for a demilitarised (Palestinian) state has always been part of the agenda."
Washington provides Israel with 2.4 billion dollars of annual military aid as well as diplomatic support, making the United States its most important ally.
Israel and the Palestinians relaunched their negotiations at a US conference in November 2007, but the talks made little progress and were suspended during Israel's blistering war on Gaza in December and January.
Netanyahu also responded to the elections in Iran, saying the "biggest threat to Israel, the Middle East and the entire world is the crossing of a nuclear weapon with radical Islam."
"During my next trips, I will work in particular toward an international coalition against the nuclear arming of Iran," he said.
Israel, the region's sole if undeclared nuclear power, has accused Iran of racing to develop atomic weapons under the guise of a civilian nuclear programme, allegations vehemently denied by Tehran.
Source : AFP
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