Foreign Minister Tzipi Livni told participants in the World Economic Forum in Davos, Switzerland on Thursday that, "A Palestinian state is not an illusion. It's there, it's achievable."

Addressing a large crowd of political leaders, business leaders and others, Livni said that Israel's negotiations with Palestinians must stick to the vision of two states living side by side as the only way to achieve peace in the region.

Livni urged the international community to support moderates in the Middle East and told Palestinian Authority Chairman Mahmoud Abbas that compromising with extremists will not promote anything, a clear reference to Hamas and other militant groups.

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Livni said that a Palestinian state would have to honor previous agreements, recognize Israel's right to exist and denounce terrorism. She emphasized Israel's desire to promote peace but said Israel can't ignore controversial issues such as the war on terror. The foreign minister called on the international community to help fight terror by preventing the transfer of funds to extremist groups, and giving support to moderate groups.

Vice Premier Shimon Peres participated in a discussion at the conference and said that Israelis and Palestinians differ only slightly in their beliefs over where the borders separating the two should lie. "We don't want a Palestinian territory, we want an independent and prosperous Palestinian state with territorial continuity," he said.

Peres added that the Palestinian refugees should be able to return to Palestine, the way Jews are able to return to Israel.

Abbas, who addressed the conference before Livni, said that peace between Israel and the Palestinians was a concept whose time had come.

Abbas, speaking in Arabic, said that such an agreement would help strengthen the hands of moderates in the region and fight extremism of all kinds.

You agree with me that the Middle East is now in dire need of peace, he said, a reference to internal strife in Iraq, disagreement in Lebanon and elsewhere.

"The Palestinian-Israeli conflict is one of the most serious conflicts that require a solution. I am fully convinced that despite all the difficulties, an atmosphere conducive to the resumption of the peace process exists," he said. "One that could lead to the establishment of a Palestinian state."

"We have the road map. A road map that includes the Arab initiative as well as President Bush's vision regarding the two-state solution," Abbas said. "What is required now, in all honesty, is for us to trace the beginning and the end of this peace process."

The map is there, he said, adding that he told Prime Minister Ehud Olmert and U.S. Secretary of State Condoleezza Rice that they had started moving in the right direction.

Abbas said that there is no need for new peace initiatives, rather there is a grave need to promote the peace process on the foundation of the existing initiatives, including the UN resolutions and the road map. He added that a "territory for peace" approach and the founding of a Palestinian state could end Palestinian-Israeli strife. He added that the solution must be all-inclusive and creative, not partial or temporary.

Abbas also spoke of poverty levels in Gaza having soared to record lows because of Israeli restrictions and the destruction of Palestinian infrastructure.

"Unemployment and poverty have reached unprecedented levels, with 79 percent of people in the Gaza Strip living below the poverty line, of which 51 percent live in utter poverty," he said.

On top of the Western sanctions, Palestinians say Israeli settlements, military checkpoints and a barrier cutting into the West Bank have also hit their economy because they seal off towns from workplaces, schools and farm fields. Israel says the barrier and checkpoints are needed to prevent militant attacks.

Abbas planned to meet with Livni during the conference to discuss ways to revitalize peace talks, an Abbas aide said Thursday. The planned meeting was confirmed by Foreign Ministry spokesman Mark Regev, but he did not specify when the meeting would take place.

Also at the conference, Saeb Erekat, a senior Palestinian negotiator and aide to Abbas, and Deputy Defense Minister Ephraim Sneh told a media briefing that a peace accord was necessary to build an alliance of moderates in an increasingly polarized region.

"It may take six months to conclude these principles and another 18 months to conclude and iron out the details," Sneh told journalists.

"There is no need of mediation," he said. "We can do it directly. It is the best way. But we need international as well as regional backing and support."

Erekat applauded recent peace efforts by U.S. Secretary of State Condoleezza Rice as "very practical."

On Thursday, Abbas met behind closed doors with German Chancellor Angela Merkel to discuss efforts aimed at reviving the long-stalled peacemaking efforts.

Abbas and Prime Minister Ehud Olmert met last month to discuss confidence-building measures that would allow the sides to get back to the negotiating table, abandoned more than six years ago.

The two are going to try to push that process forward further next month in a three-way summit with United States Secretary of State Condoleezza Rice.

The date and venue for that session have not yet been set.


At Davos, Iran's Khatami calls for calm heads in nuclear row
Former Iranian President Mohammad Khatami on Thursday called for calm heads to reduce building tensions between the United States and his country over its nuclear program.

"I hope that they would be good enough in managing the situation. We deeply need patience and understanding and not to get too emotional," Khatami said at the Davos meeting.

Iran says it needs nuclear power to generate electricity but the West is concerned it is secretly seeking an atom bomb.

Khatami declined to comment on Iran's decision earlier this week to ban a group of 38 Atomic Energy Agency (IAEA) inspectors from working in Iran.

Khatami, a cleric who was president from 1997 to 2005, also threw his support behind the U.S. Iraq Study Group proposal for the Bush administration to involve Iran in regional talks about the future of Iraq.

"Rather than confrontation, it would be better to cooperate and have dialogue with Iran and Syria," Khatami told reporters after attending a panel discussion on the outlook for Iraq.