Prime Minister Binyamin Netanyahu lifted the shroud from his diplomatic endgame on Sunday night, saying at the BESA Center at Bar-Ilan University that he would support a Palestinian state if he received international guarantees that it would be demilitarized, and if the Palestinians accepted Israel as the Jewish homeland.
"If we receive this guarantee regarding demilitarization 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," Netanyahu said to applause - the first time he has said he would accept a Palestinian state.
US President Barack Obama welcomed the prime minister's speech, calling it an important step forward.
"The president is committed to two states, a Jewish State of Israel and an independent Palestine, in the historic homeland of both peoples," White House Press Secretary Robert Gibbs said in a statement. "He believes this solution can and must ensure both Israel's security and the fulfillment of the Palestinians' legitimate aspirations for a viable state, and he welcomes Prime Minister Netanyahu's endorsement of that goal."
But 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.
In his much anticipated, 30-minute speech that was broadcast live both in Israel and in much of the Arab world, the prime minister not only dealt with the two-state issue, but also confronted the contentious issue of settlement construction head-on, saying that he would not - as the US and the Arab world are demanding - freeze all settlement construction.
"The territorial question will be discussed as part of the final peace agreement," he said. "In the meantime, we have no intention of building new settlements or of expropriating additional land for existing settlements."
But, he added, "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."
Regarding Jerusalem, Netanyahu said it "must remain the united capital of Israel with continued religious freedom for all faiths."
He did not tackle the issue of a Palestinian state, or the settlement issue, until well into his remarks, and until after he corrected the impression Obama left with his Cairo address on June 4, that Israel was the product of the Holocaust, and not the result of a timeless Jewish connection to the Land of Israel.
The connection between the Jewish people and the Land of Israel goes back more than 3,500 years, the prime minister said. "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," he said. "True, for 2,000 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 occurred."
Netanyahu, clearly relating to Obama's narrative in the Cairo speech, said the Jews' right to a sovereign state in Israel "arises from one simple fact: this is the homeland of the Jewish people, this is where our identity was forged."
Alongside this truth, he said, is another: "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."
The prime minister said that in his vision of peace; two peoples will "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."
Any peace agreement would need to be based on two principles: the first is a clear and unambiguous Palestinian recognition of Israel as the state of the Jewish people, and the second is that a future Palestinian state "must be demilitarized with ironclad security provisions for Israel," he said.
Unless these two conditions were met, he said, "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 Petah Tikva, Grad rockets on Tel Aviv, or missiles on Ben-Gurion Airport. We want peace."
Netanyahu did not spell out what type of international guarantees he had in mind, but said that 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 Hizbullah and Iran."
In an apparent reference to unceasing calls from the US administration for Israel to declare it is willing for a Palestinian state to be established, Netanyahu said, "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."
He began his tightly written speech by stressing the importance peace has always played in Jewish civilization, and then by saying he supported Obama's vision for regional peace and security.
"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," he said.
Turning to the Palestinians, Netanyahu said he knew first hand "the face of war."
"I have experienced battle," he said. "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."
The prime minister said it was necessary to be honest about why it has been so difficult to end the conflict.
"Even as we look toward the horizon, we must be firmly connected to reality, to the truth," he said. "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."
Netanyahu repeated his call to the Palestinians to begin negotiations immediately and without preconditions. In an oblique reference to the road map, he said Israel was obligated by its international commitments and expected "all parties to keep their commitments."
The coalition's right wing expressed disappointment with the call for Palestinian statehood and vowed to fight it.
Likud MK Danny Danon said the acceptance of Palestinian aspirations for statehood was "one unnecessary sentence in a brilliant speech. It goes against the Likud platform and we will work in the Knesset faction and central committee to make sure it doesn't get implemented."
MK Uri Orbach (Habayit Hayehudi) said that his Knesset faction "has to weigh its political steps in light of the dangerous implications of Netanyahu's speech and his agreement to establish a Palestinian state."
Contrary to prespeech expectations, the prime minister did not dwell heavily on Teheran's nuclear program or last Friday's elections there, relegating the Iranian threat to one paragraph.
"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," he said.
"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," he said.
Khaled Abu Toameh, Tovah Lazaroff and Rebecca Anna Stoil contributed to this report.