My vision is two states, living side by side in peace and security.

Peace requires a new and different Palestinian leadership, so that a Palestinian state can be born.

I call on the Palestinian people to elect new leaders, leaders not compromised by terror. I call upon them to build a practising democracy, based on tolerance and liberty. If the Palestinian people actively pursue these goals, America and the world will actively support their efforts.

And when the Palestinian people have new leaders, new institutions and new security arrangements with their neighbours, the United States of America will support the creation of a Palestinian state whose borders and certain aspects of its sovereignty will be provisional until resolved as part of a final settlement in the Middle East.

A Palestinian state will never be created by terror - it will be built through reform. And reform must be more than cosmetic change or a veiled attempt to preserve the status quo. True reform will require entirely new political and economic institutions, based on democracy, market economics and action against terrorism.

Today, the elected Palestinian legislature has no authority and power is concentrated in the hands of an unaccountable few. A Palestinian state can only serve its citizens with a new constitution which separates the powers of government. The Palestinian parliament should have the full authority of a legislative body: elections by the end of the year, with national elections to follow.

The United States, the international donor community and the World Bank stand ready to work with Palestinians on a major project of economic reform and development.

[The] United States will not support the establishment of a Palestinian state until its leaders engage in a sustained fight against the terrorists and dismantle their infrastructure. This will require an externally supervised effort to rebuild and reform the Palestinian security services. The security system must have clear lines of authority and accountability and a unified chain of command.

If Palestinians embrace democracy, confront corruption and firmly reject terror, they can count on American support for the creation of a provisional state of Palestine.

Israel also has a large stake in the success of a democratic Palestine. Permanent occupation threatens Israel's identity and democracy. A stable, peaceful Palestinian state is necessary to achieve the security that Israel longs for. So I challenge Israel to take concrete steps to support the emergence of a viable, credible Palestinian state.

As we make progress towards security, Israeli forces need to withdraw fully to positions they held prior to 28 September, 2000. And consistent with the recommendations of the Mitchell Committee, Israeli settlement activity in the occupied territories must stop.

The Palestinian economy must be allowed to develop. As violence subsides, freedom of movement should be restored, permitting innocent Palestinians to resume work and normal life. Palestinian legislators and officials, humanitarian and international workers, must be allowed to go about the business of building a better future. And Israel should release frozen Palestinian revenues into honest, accountable hands.

Ultimately, Israelis and Palestinians must address the core issues that divide them if there is to be a real peace, resolving all claims and ending the conflict between them. This means the Israeli occupation that began in 1967 will be ended through a settlement negotiated between the parties, based on UN Resolutions 242 and 338, with Israeli withdrawal to secure and recognised borders.

We must also resolve questions concerning Jerusalem, the plight and future of Palestinian refugees and a final peace between Israel and Lebanon and Israel and Syria that supports peace and fights terror.

As new Palestinian institutions and new leaders emerge, demonstrating real performance on security and reform, I expect Israel to respond and work towards a final status agreement. With intensive effort by all, this agreement could be reached within three years from now.

Selected from US President Bush's 24 June policy speech on the Middle East