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A source in Prime Minister Benjamin Netanyahu's party confirmed Wednesday that his new government intended to distance itself from U.S.-sponsored understandings on working towards a Palestinian state.

Asked about ultra-nationalist Lieberman's remark that Israel was no longer bound by the 2007 framework, the source replied: "There is no problem here. He [Lieberman] is distancing himself from the Annapolis label, as the government intends to do."

Hadash MK Afu Aghbaria, meanwhile, urged the international community to impose a diplomatic embargo on Israel in the wake of Lieberman;s statements. "It isn't surprising that a racist foreign minister would produce such vehement suggestions, only a day after the new government was formed," Aghbaria said.

Palestinian President Mahmoud Abbas responded to the swearing-in of Benjamin Netanyahu's government by saying: "We want to tell the world that this man doesn't believe in peace and therefore we cannot deal with him... the world should put pressure on him."

Speaking to what the Associated Press describes as a roomful of "cringing diplomats", the new foreign minister said Israel was not bound by the Annapolis peace talks. These were initiated in November 2007 to solve the Israeli-Palestinian conflict and involved around 40 countries.

"The Israeli government never ratified Annapolis; nor did [the] Knesset," said Lieberman, promising to honour only the US-initiated "road map" of 2002, which has long been in stalemate amid accusations from both sides.

In today's speech, Lieberman was more amiable towards Egypt, which he described as an "important element in the Arab world". This is an improvement on a few weeks ago, when he said the Egyptian president, Hosni Mubarak, could "go to hell".

It remains to be seen whether Lieberman would be willing to accept a truly independent Palestinian state — Netanyahu has indicated that he won't, insisting, in the name of the Jewish state's security, that Israel control the air space and borders of such an entity, and have veto over its military and foreign policies. Netanyahu's track record, however, is also more pragmatic than ideological. Despite his open loathing of Yasser Arafat, his previous government in 1998 signed a deal with the late PLO leader for the withdrawal of Israeli forces from parts of the West Bank, including the sensitive biblical town of Hebron.

Publicly, at least, Netanyahu continues to take a hard line, rejecting the idea of an Israeli withdrawal from the Golan Heights in order to get peace with Syria. Lieberman talks only of "peace for peace," rather than land for peace. But Netanyahu knows that no peace deal is possible without returning the Syrian territory captured in the war of 1967, and he may be ready to find a formula for its return if Syria is truly ready for a peace deal.

Syrian President Assad, having established firm control of the often opaque regime he inherited from his late father, Hafez al-Assad, appears to be willing to pick up where his father left off in seeking a deal with Israel. Assad was instrumental in starting indirect, Turkish-mediated talks with Israel despite initial opposition by the Bush Administration

In the past, two former Labor Prime Ministers, the late Yitzhak Rabin and Barak, were ready to withdraw from almost all of the Golan Heights. Netanyahu himself may have been, too: during his first term as Prime Minister, he reportedly ran a back-channel negotiation with the Syrians.

President Obama recently sent two senior officials to Damascus to test the waters, signaling Washington's willingness to end its campaign to isolate Syria.

early success on the Israel-Syria track would do wonders for the Administration's wider Middle East ambitions. Not only would it formally cement the 40-plus years of relative calm on the Israeli-Syrian frontier, it would potentially detach Syria from its alliance with Iran, and enlist Damascus in moderating or eliminating two key radical elements — Hamas and Hizballah — on Israel's borders

Iran's resulting loss of influence in the region could, in turn, help induce Tehran to rethink its more confrontational positions, particularly on the nuclear issue.

Shlomo Brom, a retired general at the Institute for National Security Studies in Tel Aviv, said it would be “very logical” to assume that Israel would have wanted to bomb a weapons convoy in Sudan. “It fits exactly with the pattern of how Israel operates,” he said.

Israeli military analysts said that eastern Sudan could have been a little-watched backdoor for Iranian weapons to reach Gaza.

In what appears to be a concession to win Labour's support, he and Barak agreed a joint platform that would commit the new government to working for a "comprehensive regional agreement for peace and co-operation in the Middle East", according to the Israeli press.Though that platform says the new government will work towards peace with its neighbours and will respect Israel's international agreements, there was no explicit mention of the creation of an independent Palestine.

Binyamin Netanyahu, head of the right-wing Likud party, will be prime minister and possibly finance minister.• Avigdor Lieberman, the far-right head of the Israel Our Home party, who campaigned in favour of a law demanding all Israel's Arabs swear an oath of loyalty to the country as a Jewish state, will be foreign minister.• Ehud Barak (below), head of the Labour party, who last month seemed resigned to going into opposition, will stay on as defence minister.• Eli Yishai, the head of the ultra-Orthodox Shas party, will be interior minister.

Mr. Netanyahu says he wants to give Palestinians freedom to govern themselves, but won't grant them all the powers of statehood, such as an independent army that could pose a threat to Israel. "We do not want to govern the Palestinians," he said. "We want them to live in peace and govern themselves absent a handful of powers."

Mr. Netanyahu has said he is ready to resume negotiations immediately on three parallel tracks dealing with political, economic and security issues, but the Palestinians have said they won't resume negotiations until Mr. Netanyahu accepts their right to statehood.

"By failing to endorse the two-state solution, Benjamin Netanyahu missed yet another opportunity to show himself to be a genuine partner for peace," Mr. Erekat said after the meeting. "Calling for negotiations without a clearly defined end-goal offers only the promise of more process, not progress."

Mr. Obama spoke out against Israel's expansion of Jewish settlements. Construction of settlements in the West Bank has continued despite pledges to halt such building by former Prime Minister Ariel Sharon. "Settlements have to be stopped in order for us to move forward," Mr. Obama said.

Mr. Netanyahu said after the meeting that Israel would halt settlement expansion as part of a mutual process in which the Palestinians also made concessions, such as cracking down on militants.

Though Israel has shown little interest in the Arab peace initiative, Mr. Netanyahu appears to share the belief that, in the face of an ascendant Iran, there is a new window of opportunity. "In the life of the Jewish state there's never been a time when Arabs and Israelis see a common threat like we see today," he said.

On Iran, Mr. Obama said the U.S. will give talks more time, but that there must be a "clear timetable at which point we say, these talks aren't making any progress."

Mr. Netanyahu has been seeking clear timetables for U.S. diplomatic outreach toward Tehran, and assurances that sanctions would follow if negotiations fail. Israel fears Iran is within months of producing enough fissile material to produce an atomic bomb, though Israeli and U.S. intelligence officials believe it could take Iran years to assemble one.

Speaking of the development and deployment of a nuclear weapon, he said, “We’re not going to create a situation in which talks become an excuse for inaction while Iran proceeds.” Mr. Obama added that he intended to “gauge and do a reassessment by the end of the year” on whether the diplomatic approach was producing results.

He said he expected international talks with Iran, involving six nations including the United States, to begin shortly after the Iranian elections in June, with the possibility of “direct talks” between the United States and Iran after that.

“The logic of Netanyahu’s argument is, ‘What do you do if your power of diplomacy and toughened sanctions doesn’t work?’ ” said Aaron David Miller, a former Middle East negotiator in both Democratic and Republican administrations. “Anyone who was expecting a major rift in the U.S.-Israeli relationship is going to be disappointed.”

Mr. Netanyahu did not explicitly embrace a two-state solution, as Mr. Obama had hoped. Rather, he said, “I want to make it clear that we don’t want to govern the Palestinians; we want to live in peace with them.”

Mr. Obama, meanwhile, pressed Mr. Netanyahu to freeze the construction of Israeli settlements on the West Bank. “Settlements have to be stopped in order for us to move forward,” Mr. Obama said. “That’s a difficult issue. I recognize that. But it’s an important one, and it has to be addressed.”

Mr. Miller, the former Middle East negotiator, characterized the session as “President ‘Yes We Can’ sitting down with Prime Minister ‘No You Won’t.’ ”

In his speech, he said he believes the Palestinian people "have the right to govern themselves," but he made no mention of an independent Palestinian state -- something that he has voiced his support for in the past. Peres was president under Netanyahu's predecessor, Prime Minister Ehud Olmert, who supported a two-state solution to achieve peace with Palestinians.

He expressed support for Obama and vowed to "deliver to him a strong message from a country yearning for peace." "Make no mistake: The present government will abide to the commitments of the previous governments of Israel," Peres said.

A former Pentagon analyst, Lawrence Franklin, has already pleaded guilty to disclosing classified information to Rosen and Weissman.

The case has been further complicated by a scandal revealed last month by a political publication, Congressional Quarterly, around a member of Congress, Jane Harman, who was secretly taped telling an Israeli agent that she would pressure the justice department to reduce spying charges against the two former Aipac officials.In return, the Israeli agent offered to get a wealthy donor who helps funds election campaigns for Nancy Pelosi, the then-minority leader in the House of Representatives, to pressure Pelosi to appoint Harman to a senior position on the congressional intelligence committee.Aware of the sensitivity of the position she has put herself in, Harman finished the discussion with the Israeli spy by saying: "This conversation doesn't exist."

Congressional Quarterly obtained a transcript of the tape recorded by the National Security Agency. An FBI probe of Harman was dropped after the intervention of President Bush's attorney general, Alberto Gonzales.

Israeli military officials, speaking on the condition of anonymity under army rules, said that Palestinian forces would now be able to operate 24 hours a day in the cities of Ramallah, Qalqilya, Bethlehem and Jericho, and would have to coordinate less with Israeli forces in the area, implying that the forces would reduce their own nighttime raids on those cities.

Israeli forces have been carrying out arrest raids almost nightly. On Wednesday night, for example, seven Palestinian suspects were arrested, and on Monday night six were arrested, including three from Qalqilya.

Military officials emphasized that the army would continue to operate in all the West Bank, but one said that the army would now enter the four cities only “in case of an urgent security need, and in accordance with security assessments.”

Two recent deadly shootouts in Qalqilya between Palestinian forces and armed Palestinian militants of the Islamic group Hamas have been mentioned as evidence of a new determination on the part of the Palestinian security apparatus. Four police officers, four militants and a bystander were killed in the clashes that occurred during attempts to arrest the gunmen.

In addition to removing the checkpoints, Israel says it has agreed to issue more V.I.P. cards for Palestinian businessmen, to ease their passage over the crossings into Israel.

Detailed explanations on the economic ramifications of a failure to resolve the conflict, or demonstrations on a possible Arab shift toward supporting a binational state led many people to realize that "time is not on our side" and that the cost of a future peace may exceed that of peace today.

Since the outbreak of the Al-Aqsa Intifada, the fear of "terror now" has silenced the public discourse on "peace now." In the absence of an effective left, there is no agent in Israel able to convince the public of the urgent need for change, and to outline the heavy cost of perpetuating the conflict. Israel's right has entered this enormous void and filled it with alternative fears: It points to Hamastan at Jerusalem's gates and expresses fear in the face of the right of return and horror at Barack Hussein Obama.

Mr. Obama seemed to connect with his audience in his 55-minute speech from Cairo University as he quoted repeatedly from the Koran and occasionally sprinkled his remarks with Arabic, even beginning his address with the traditional Arabic greeting “salaam aleikum,” or “peace be upon you.”

while he spoke uncompromisingly of the American fight against Al Qaeda, Mr. Obama never mentioned the words “terrorism” or “terrorist.” That was a departure from the language used by the Bush administration, but one that some Middle East experts suggested reflected a belief by the new administration that overuse had made the words inflammatory.

Paul D. Wolfowitz, a former top Bush administration official who was an architect of the war in Iraq and is a strong supporter of Israel, offered general praise for Mr. Obama’s address. “I could have used less moral equivalence, but he had to get through to his audience, and it’s in America’s interest for him to get through,” Mr. Wolfowitz said.

Mr. Obama’s stark statement that “the United States does not accept the legitimacy of continued Israeli settlements” is also likely to be seen as a sharp challenge to Israeli assumptions that existing West Bank settlements will always be allowed to remain.

It was noteworthy that the only Palestinian political group that Mr. Obama specifically mentioned was Hamas, the militant Islamic organization that won Palestinian legislative elections in 2006. Hamas governs Gaza, but is loathed by Israel. Mr. Obama called on Hamas to forswear violence and recognize Israel’s right to exist, but Middle East experts said that his mention was an acknowledgment that Hamas might have become a more important actor than the Fatah Party, controlled by Mahmoud Abbas, the Palestinian president. Mr. Obama said, “Hamas does have support among some Palestinians, but they also have to recognize they have responsibilities.”

In some areas of the West Bank, Palestinians are surviving on as little as 10 to 15 litres a person each day, which is at or below humanitarian disaster response levels recommended to avoid epidemics. In Gaza, where Palestinians rely on an aquifer that has become increasingly saline and polluted, the situation is worse. Only 5%-10% of the available water is clean enough to drink.

Gidon Bromberg, the Israeli head of Friends of the Earth Middle East, said there was a clear failure to meet basic water needs for both Israelis and Palestinians, and that Israelis were taking "the lion's share".

In Gaza, the continued Israeli economic blockade played a key role in preventing maintenance and construction of sewage and water projects. In the West Bank, Israeli military controls over the Palestinians were a factor, with Palestinians still waiting for approval on 143 water projects.

Yossi Dreisen, a former official and now adviser at the Israeli water authority, disputed the Bank's findings and said many remarks in the report were "not correct". He produced figures suggesting Israeli water consumption per person had fallen since 1967, when Israel captured and occupied the West Bank, while Palestinian consumption had risen.

There is not enough water in this area," said Dreisen. "Something must be done. The solution where one is giving water to the other is not acceptable to us."However, Fuad Bateh, an adviser to the Palestinian water authority, said Israel continued to have obligations under international law as the occupying power and should allow Palestinians water resources through an "equitable and reasonable allocation in accordance with international law".

Palestinians had not been allowed to develop any new production wells in the West Bank since the 1967 war.

Both Israeli Arab and rightist political leaders blasted the speech as political spin, while President Shimon Peres praised it as "strengthening Israel's international position and opening the door to direct peace negotiations." "The Prime Minister's speech was a true and courageous speech that referred to the main issue - the establishment of a demilitarized Palestinian state alongside the state of Israel, the state of the Jewish People," said Peres.

MK Aryeh Eldad (National Union) accused Netanyahu of violating his own promises and said the nationalist camp could no longer support his policies. "Today the prime minister lost the leadership of the nationalist camp by not only transgressing his own red lines, but by converting from his own religion," said Eldad of Netanyahu's declaration that he would accept the creation of a Palestinian state so long as the international community could guarantee it remains demilitarized. "With the expression 'demilitarized Palestinian state,' Netanyahu is trying to eat a pig butchered in a kosher way," he added. "There is no such thing as a demilitarized state, Netanyahu knows very well that no political force on earth can prevent a country from arming itself or signing military treaties like any other country."

MK Zevulun Orlev, of the Jewish Home party, said that the policy represented a drastic change in stance and was an affront to the coalition agreement.

But the White House called the policy outline an "important step forward", as did French Foreign Minister Bernard Kouchner.

In Gaza, Hamas spokesman Sami Abu Zuhri described the speech as "racist" and called on Arab nations to "form stronger opposition" towards Israel.

Mr Erekat added: "The peace process has been moving at the speed of a tortoise. Tonight, Netanyahu has flipped it over on its back."

A White House statement said Mr Obama "believes this solution can and must ensure both Israel's security and the fulfilment of the Palestinians' legitimate aspirations for a viable state, and he welcomes Prime Minister Netanyahu's endorsement of that goal".

In his own keynote Middle East speech in Cairo on 4 June, Mr Obama stressed that he wanted all settlement activity to stop. But Mr Netanyahu said settlers were not "enemies of peace" and did not move from his position of backing "natural growth" in existing settlements.

The settlers group Yesha condemned Mr Netanyahu's speech: "We deplore that the prime minister has agreed to the creation of a demilitarised Palestinian state after he has said for years that such a state, even demilitarised, would be a threat to Israel."

Nabil Abu Rdainah, a spokesman for Mahmoud Abbas, the Palestinian president, dismissed the speech, saying: "Netanyahu's remarks have sabotaged all initiatives, paralysed all efforts being made and challenges the Palestinian, Arab and American positions."

Saeb Erekat, the Palestinians' senior negotiator, called on Obama to intervene to force Israel to abide by previous interim agreements that include freezing settlement activity in the West Bank. "The peace process has been moving at the speed of a tortoise. Tonight, Netanyahu has flipped it over on its backm," he said.

This is the first occasion that Netanyahu has endorsed the creation of a Palestinian state, but many see a disarmed Palestinian state as handing too much power to Israel. "Netanyahu did not accept the principle of a two-state solution," Lamis Andoni, Al Jazeera's Middle East analyst, said. "He reduced the concept of a Palestinian state to that of a demilitarised entity that would remain under Israeli control. 

"This is at best a formula to establish a Palestinian Bantustan that will not end the Israeli occupation but would legitimise Israeli control."

The Palestinians have said that they will not restart negotiations unless Netanyahu publicly backs the two-state solution and stops the building of Jewish settlements on Palestinian land.

He said there would be an end to new settlement building, but vowed that Jerusalem would remain undivided. Addressing Palestinian, Netanyahu urged them to recognise Israel as a Jewish state. "Israel is the nation state of the Jewish people and so it shall remain," he said.

Over the last few years, Egypt has worked exhaustively to unite the Palestinian leadership in a manner that upholds their commitment to a negotiated two-state solution. Egypt has also tried to broker a durable cease-fire between Hamas and Israel, in parallel with our mediation on a prisoner exchange. During Israeli Prime Minister Benjamin Netanyahu's visit to Egypt last month I renewed our commitment to resume these efforts.

The priority should be to resolve the permanent borders of a sovereign and territorially contiguous Palestinian state, based on the 1967 lines, as this would unlock most of the other permanent status issues, including settlements, security, water and Jerusalem.

Israel's relentless settlement expansion, which has seriously eroded the prospects for a two-state solution, must cease, together with its closure of Gaza. For their part, the Palestinians must continue to develop their institutional capacity while overcoming their division to achieve their aspirations for statehood.

While full normalization with Israel can only result from a comprehensive settlement including the Syrian, Lebanese as well as Palestinian track, the Arab side stands ready to reciprocate serious steps towards peace undertaken by Israel.

A historic settlement is within reach, one that would give the Palestinians their state and freedom from occupation while granting Israel recognition and security to live in peace.

With President Obama's reassertion of U.S. leadership in the region, a rare moment of opportunity presents itself. Egypt stands ready to seize that moment, and I am confident that the Arab world will do the same.