Israeli Prime Minister Binyamin Netanyahu Says Two-State Solution Possible, With Conditions

June 14, 2009 -- It was billed as the speech of his political life, and it was one in which Prime Minister Binyamin Netanyahu finally spoke of a Palestinian state, albeit one with very strict limits.

"In my vision of peace," he said, "in this small land of ours, two peoples live freely, side-by-side, in amity and mutual respect, each with its own flag and national anthem."

At Israel's Bar–Ilan University, which is known as a hot house for Israel's right wing political class, Netanyahu outlined his conditions for the eventual creation of a Palestinian state.

"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," he said.

A short statement from the White House tonight said, "The President welcomes the important step forward in Prime Minister Netanyahu's speech."

Netanyahu warned yet again of the dangers of Iran's pursuit of nuclear power but declared his willingness to talk regional peace with neighboring Arab states.

"Let us meet. Let us speak of peace and let us make peace. I am ready to meet with you anytime. I am willing to go to Damascus, to Riyadh, to Beirut, to any place including Jerusalem," he said.

But on some of the key issues that divide Israelis and Palestinians there were some uncompromising declarations.

He demanded that the problem of Palestinian refugees created when the state of Israel was born would have to be dealt with inside the future Palestine -- none would be allowed back into Israel.

He said, "Jerusalem must remain the united capital of Israel," despite Palestinian demands it should be shared by both states.

And he was also uncompromising on President Obama's demand for a total freeze on Israeli settlement building in the West Bank.

"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 lead normal lives, to allow mothers and fathers to raise their children like families elsewhere." He said. That has been taken as a commitment to continue building homes for so called natural growth.

That has caused anger from even moderate Palestinians, like the chief Palestinian negotiator Dr. Saeb Erekat in a telephone interview with ABC News.

"He is not with the two state solution and he is not going to stop settlements. This peace process has been moving like a turtle, and this speech flips it onto its back," he said.

Prime Minister Netanyahu's challenge was always going to be to steer a course between U.S. demands for him to embrace the two-state solution, and the limitations of his own right wing political partners who oppose it. Some of them are already saying the speech went too far.

For Washington, despite the initial positive reaction from the White House, the speech went so far, but almost certainly not far enough.