...Palestinian Authority officials in Ramallah expressed outrage and shock over Netanyahu's call for a demilitarized Palestinian state and his demand that the Palestinians recognize Israel as a Jewish state.

The officials said the speech was much worse than they had expected. They also warned that Netanyahu's policies would trigger a new intifada...

...I think it is accurate to say that this speech expressed the most profound consensus in Israel on these issues and that the country will fully back up its prime minister on this policy. It is also a view of the region and the conflict far more accurate than that usually purveyed by others, both those who claim to have Israel's "best interests" at heart, and those who would "wipe it off the map."

Honored guests, citizens of Israel.

Peace has always been our people's most ardent desire. Our prophets gave the world the vision of peace, we greet one another with wishes of peace, and our prayers conclude with the word peace.

We are gathered this evening in an institution named for two pioneers of peace, Menachem Begin and Anwar Sadat, and we share in their vision.

Two and half months ago, I took the oath of office as the Prime Minister of Israel. I pledged to establish a national unity government - and I did. I believed and I still believe that unity was essential for us now more than ever as we face three immense challenges - the Iranian threat, the economic crisis, and the advancement of peace.

The Iranian threat looms large before us, as was further demonstrated yesterday. The greatest danger confronting Israel, the Middle East, the entire world and human race, is the nexus between radical Islam and nuclear weapons.

I discussed this issue with President Obama during my recent visit to Washington, and I will raise it again in my meetings next week with European leaders. For years, I have been working tirelessly to forge an international alliance to prevent Iran from acquiring nuclear weapons.

Confronting a global economic crisis, the government acted swiftly to stabilize Israel's economy. We passed a two year budget in the government - and the Knesset will soon approve it.

And the third challenge, so exceedingly important, is the advancement of peace. I also spoke about this with President Obama, and I fully support the idea of a regional peace that he is leading.

I share the President's desire to bring about a new era of reconciliation in our region. To this end, I met with President Mubarak in Egypt, and King Abdullah in Jordan, to elicit the support of these leaders in expanding the circle of peace in our region.

I turn to all Arab leaders tonight and I say: "Let us meet. Let us speak of peace and let us make peace. I am ready to meet with you at any time. I am willing to go to Damascus, to Riyadh, to Beirut, to any place - including Jerusalem.

I call on the Arab countries to cooperate with the Palestinians and with us to advance an economic peace. An economic peace is not a substitute for a political peace, but an important element to achieving it.

Together, we can undertake projects to overcome the scarcities of our region, like water desalination or to maximize its advantages, like developing solar energy, or laying gas and petroleum lines, and transportation links between Asia, Africa and Europe.

The economic success of the Gulf States has impressed us all and it has impressed me. I call on the talented entrepreneurs of the Arab world to come and invest here and to assist the Palestinians - and us - in spurring the economy.

Together, we can develop industrial areas that will generate thousands of jobs and create tourist sites that will attract millions of visitors eager to walk in the footsteps of history - in Nazareth and in Bethlehem, around the walls of Jericho and the walls of Jerusalem, on the banks of the Sea of Galilee and the baptismal site of the Jordan.

There is an enormous potential for archeological tourism, if we can only learn to cooperate and to develop it.

I turn to you, our Palestinian neighbors, led by the Palestinian Authority, and I say: Let's begin negotiations immediately without preconditions.

Israel is obligated by its international commitments and expects all parties to keep their commitments.

We want to live with you in peace, as good neighbors. We want our children and your children to never again experience war: that parents, brothers and sisters will never again know the agony of losing loved ones in battle; that our children will be able to dream of a better future and realize that dream; and that together we will invest our energies in plowshares and pruning hooks, not swords and spears.

I know the face of war. I have experienced battle. I lost close friends, I lost a brother. I have seen the pain of bereaved families. I do not want war. No one in Israel wants war.

If we join hands and work together for peace, there is no limit to the development and prosperity we can achieve for our two peoples - in the economy, agriculture, trade, tourism and education - most importantly, in providing our youth a better world in which to live, a life full of tranquility, creativity, opportunity and hope.

If the advantages of peace are so evident, we must ask ourselves why peace remains so remote, even as our hand remains outstretched to peace? Why has this conflict continued for more than sixty years?

In order to bring an end to the conflict, we must give an honest and forthright answer to the question: What is the root of the conflict?

In his speech to the first Zionist Conference in Basel, the founder of the Zionist movement, Theodore Herzl, said about the Jewish national home "This idea is so big that we must speak of it only in the simplest terms." Today, I will speak about the immense challenge of peace in the simplest words possible.

Even as we look toward the horizon, we must be firmly connected to reality, to the truth. And the simple truth is that the root of the conflict was, and remains, the refusal to recognize the right of the Jewish people to a state of their own, in their historic homeland.

In 1947, when the United Nations proposed the partition plan of a Jewish state and an Arab state, the entire Arab world rejected the resolution. The Jewish community, by contrast, welcomed it by dancing and rejoicing.

The Arabs rejected any Jewish state, in any borders.

Those who think that the continued enmity toward Israel is a product of our presence in Judea, Samaria and Gaza, is confusing cause and consequence.

The attacks against us began in the 1920s, escalated into a comprehensive attack in 1948 with the declaration of Israel's independence, continued with the fedayeen attacks in the 1950s, and climaxed in 1967, on the eve of the six-day war, in an attempt to tighten a noose around the neck of the State of Israel.

All this occurred during the fifty years before a single Israeli soldier ever set foot in Judea and Samaria .

Fortunately, Egypt and Jordan left this circle of enmity. The signing of peace treaties have brought about an end to their claims against Israel, an end to the conflict.

But to our regret, this is not the case with the Palestinians. The closer we get to an agreement with them, the further they retreat and raise demands that are inconsistent with a true desire to end the conflict.

Many good people have told us that withdrawal from territories is the key to peace with the Palestinians. Well, we withdrew. But the fact is that every withdrawal was met with massive waves of terror, by suicide bombers and thousands of missiles.

We tried to withdraw with an agreement and without an agreement. We tried a partial withdrawal and a full withdrawal. In 2000 and again last year, Israel proposed an almost total withdrawal in exchange for an end to the conflict, and twice our offers were rejected.

We evacuated every last inch of the Gaza strip, we uprooted tens of settlements and evicted thousands of Israelis from their homes, and in response, we received a hail of missiles on our cities, towns and children.

The claim that territorial withdrawals will bring peace with the Palestinians, or at least advance peace, has up till now not stood the test of reality.

In addition to this, Hamas in the south, like Hezbollah in the north, repeatedly proclaims their commitment to "liberate" the Israeli cities of Ashkelon, Beersheba, Acre and Haifa.

Territorial withdrawals have not lessened the hatred, and to our regret, Palestinian moderates are not yet ready to say the simple words: Israel is the nation-state of the Jewish people, and it will stay that way.

Achieving peace will require courage and candor from both sides, and not only from the Israeli side.

The Palestinian leadership must arise and say: "Enough of this conflict. We recognize the right of the Jewish people to a state of their own in this land, and we are prepared to live beside you in true peace."

I am yearning for that moment, for when Palestinian leaders say those words to our people and to their people, then a path will be opened to resolving all the problems between our peoples, no matter how complex they may be.

Therefore, a fundamental prerequisite for ending the conflict is a public, binding and unequivocal Palestinian recognition of Israel as the nation state of the Jewish people.

To vest this declaration with practical meaning, there must also be a clear understanding that the Palestinian refugee problem will be resolved outside Israel's borders. For it is clear that any demand for resettling Palestinian refugees within Israel undermines Israel's continued existence as the state of the Jewish people.

The Palestinian refugee problem must be solved, and it can be solved, as we ourselves proved in a similar situation. Tiny Israel successfully absorbed tens of thousands of Jewish refugees who left their homes and belongings in Arab countries.

Therefore, justice and logic demand that the Palestinian refugee problem be solved outside Israel's borders. On this point, there is a broad national consensus. I believe that with goodwill and international investment, this humanitarian problem can be permanently resolved.

So far I have spoken about the need for Palestinians to recognize our rights. In am moment, I will speak openly about our need to recognize their rights.

But let me first say that the connection between the Jewish people and the Land of Israel has lasted for more than 3500 years. Judea and Samaria, the places where Abraham, Isaac, and Jacob, David and Solomon, and Isaiah and Jeremiah lived, are not alien to us. This is the land of our forefathers.

The right of the Jewish people to a state in the land of Israel does not derive from the catastrophes that have plagued our people. True, for 2000 years the Jewish people suffered expulsions, pogroms, blood libels, and massacres which culminated in a Holocaust - a suffering which has no parallel in human history.

There are those who say that if the Holocaust had not occurred, the state of Israel would never have been established. But I say that if the state of Israel would have been established earlier, the Holocaust would not have occured.

This tragic history of powerlessness explains why the Jewish people need a sovereign power of self-defense.

But our right to build our sovereign state here, in the land of Israel, arises from one simple fact: this is the homeland of the Jewish people, this is where our identity was forged.

As Israel's first Prime Minister David Ben-Gurion proclaimed in Israel's Declaration of Independence: "The Jewish people arose in the land of Israel and it was here that its spiritual, religious and political character was shaped. Here they attained their sovereignty, and here they bequeathed to the world their national and cultural treasures, and the most eternal of books."

But we must also tell the truth in its entirety: within this homeland lives a large Palestinian community. We do not want to rule over them, we do not want to govern their lives, we do not want to impose either our flag or our culture on them.

In my vision of peace, in this small land of ours, two peoples live freely, side-by-side, in amity and mutual respect. Each will have its own flag, its own national anthem, its own government. Neither will threaten the security or survival of the other.

These two realities - our connection to the land of Israel, and the Palestinian population living within it - have created deep divisions in Israeli society. But the truth is that we have much more that unites us than divides us.

I have come tonight to give expression to that unity, and to the principles of peace and security on which there is broad agreement within Israeli society. These are the principles that guide our policy.

This policy must take into account the international situation that has recently developed. We must recognize this reality and at the same time stand firmly on those principles essential for Israel.

I have already stressed the first principle - recognition. Palestinians must clearly and unambiguously recognize Israel as the state of the Jewish people.

The second principle is: demilitarization. The territory under Palestinian control must be demilitarized with ironclad security provisions for Israel.

Without these two conditions, there is a real danger that an armed Palestinian state would emerge that would become another terrorist base against the Jewish state, such as the one in Gaza.

We don't want Kassam rockets on Petach Tikva, Grad rockets on Tel Aviv, or missiles on Ben-Gurion airport. We want peace.

In order to achieve peace, we must ensure that Palestinians will not be able to import missiles into their territory, to field an army, to close their airspace to us, or to make pacts with the likes of Hezbollah and Iran. On this point as well, there is wide consensus within Israel.

It is impossible to expect us to agree in advance to the principle of a Palestinian state without assurances that this state will be demilitarized.

On a matter so critical to the existence of Israel, we must first have our security needs addressed.

Therefore, today we ask our friends in the international community, led by the United States, for what is critical to the security of Israel: Clear commitments that in a future peace agreement, the territory controlled by the Palestinians will be demilitarized: namely, without an army, without control of its airspace, and with effective security measures to prevent weapons smuggling into the territory - real monitoring, and not what occurs in Gaza today. And obviously, the Palestinians will not be able to forge military pacts.

Without this, sooner or later, these territories will become another Hamastan. And that we cannot accept.

I told President Obama when I was in Washington that if we could agree on the substance, then the terminology would not pose a problem.

And here is the substance that I now state clearly:

If we receive this guarantee regarding demilitirization and Israel's security needs, and if the Palestinians recognize Israel as the State of the Jewish people, then we will be ready in a future peace agreement to reach a solution where a demilitarized Palestinian state exists alongside the Jewish state.

Regarding the remaining important issues that will be discussed as part of the final settlement, my positions are known: Israel needs defensible borders, and Jerusalem must remain the united capital of Israel with continued religious freedom for all faiths.

The territorial question will be discussed as part of the final peace agreement. In the meantime, we have no intention of building new settlements or of expropriating additional land for existing settlements.

But there is a need to enable the residents to live normal lives, to allow mothers and fathers to raise their children like families elsewhere. The settlers are neither the enemies of the people nor the enemies of peace. Rather, they are an integral part of our people, a principled, pioneering and Zionist public.

Unity among us is essential and will help us achieve reconciliation with our neighbors.

That reconciliation must already begin by altering existing realities. I believe that a strong Palestinian economy will strengthen peace.

If the Palestinians turn toward peace - in fighting terror, in strengthening governance and the rule of law, in educating their children for peace and in stopping incitement against Israel - we will do our part in making every effort to facilitate freedom of movement and access, and to enable them to develop their economy. All of this will help us advance a peace treaty between us.

Above all else, the Palestinians must decide between the path of peace and the path of Hamas. The Palestinian Authority will have to establish the rule of law in Gaza and overcome Hamas.

Israel will not sit at the negotiating table with terrorists who seek their destruction.

Hamas will not even allow the Red Cross to visit our kidnapped soldier Gilad Shalit, who has spent three years in captivity, cut off from his parents, his family and his people. We are committed to bringing him home, healthy and safe.

With a Palestinian leadership committed to peace, with the active participation of the Arab world, and the support of the United States and the international community, there is no reason why we cannot achieve a breakthrough to peace.

Our people have already proven that we can do the impossible. Over the past 61 years, while constantly defending our existence, we have performed wonders.

Our microchips are powering the world's computers. Our medicines are treating diseases once considered incurable. Our drip irrigation is bringing arid lands back to life across the globe. And Israeli scientists are expanding the boundaries of human knowledge.

If only our neighbors would respond to our call - peace too will be in our reach.

I call on the leaders of the Arab world and on the Palestinian leadership, let us continue together on the path of Menahem Begin and Anwar Sadat, Yitzhak Rabin and King Hussein. Let us realize the vision of the prophet Isaiah, who in Jerusalem 2700 years ago said: "nations shall not lift up sword against nation, and they shall learn war no more."

With God's help, we will know no more war. We will know peace.