Prime Minister Ehud Olmert yesterday proposed to U.S. Secretary of State Condoleezza Rice that Israel and the Palestinians draft "agreed principles" for establishing a Palestinian state as a basis for the international peace conference that the United States is sponsoring this fall.

A government source said that there is no need for the parties to sign a detailed agreement on principles, but it is necessary to agree on how to progress.

Olmert told Rice that currently, the Palestinians are unable to implement a final-status deal, and therefore, it is necessary to proceed cautiously. "The Americans and the Palestinians also understand this," the source said.

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Olmert also urged Rice to include Saudi Arabia, Tunisia, Morocco, Bahrain and other Persian Gulf states in the conference, adding that it was important for the delegates to be of ministerial rank at least.

His remarks came hours after Saudi Arabia's foreign minister announced that Riyadh would "seriously consider" sending delegates to the conference. A senior American official noted that "this is the first time we have heard messages like this from Saudi Arabia," but warned that the U.S. is still not certain what the Saudis will do.

The American official also said that in advance of the conference, "the U.S. is interested in seeing as much progress as possible in bilateral talks between Israel and the Palestinians."

At a press conference following a meeting with Foreign Minister Tzipi Livni yesterday, Rice also downplayed expectations about a Saudi breakthrough at the conference. "We haven't sent any invitations yet," she said. "There is no need for anybody to say whether they are going to come or not."

Thus far, she said, she has merely been consulting with Arab foreign ministers about the conference's format and content. Nevertheless, she added, she has been encouraged by the Arab response.

Saudi Foreign Minister Saud al-Faisal announced Riyadh's willingness to consider attending at a press conference with Rice and Defense Secretary Robert Gates prior to the former's departure for Israel.

"When we get an invitation from the minister [Rice] to attend, when this takes place, we will study it and we will be keen to attend," he said.

However, he stressed, "we are interested in the peace conference, one that deals with the heart of the peace process, the issues of peace, the core issues, not one that is just a podium for meetings and talk that do not enrich peace." Without guarantees that the conference will address these issues, therefore, Saudi delegates are unlikely to attend.

A source in Jerusalem told Haaretz he believed that the tentative Saudi decision to attend was sparked by the U.S. government's announcement of a $20 billion arms deal with Saudi Arabia over the weekend, and the fact that Israel did not publicly object to it.

Saudi Arabia has no diplomatic relations with Israel, and a conference attended by both countries would be hailed as a diplomatic breakthrough.

Olmert also used his meeting with Rice to detail the gestures that Israel has made to Palestinian Authority Chairman Mahmoud Abbas recently. However, he said, it is too soon to speak about transferring parts of the West Bank to PA security control; such a step would first require increased security cooperation and reduced terrorism.

The prime minister added that Hamas must be "kept out of the game" as Israel explores new cooperation with the Palestinians.

Olmert and Abbas will meet next week, possibly in Jericho.

Rice said that her current visit to Israel and the PA is aimed at taking advantage of "mutual opportunities" to advance the two-state solution.

"This is a time to seize opportunities and it is a time to proceed in a prepared and careful way, as one does not want to miss opportunities because of a lack of preparation, but it is nonetheless a time when we have to take advantage of what is before us," she told reporters at following her talks with Livni.

Livni said that Israel also recognized that this was a propitious time for peace efforts, and aimed to exploit it.

"There is a Palestinian government which meets the requirements of the international community, a government that believes in the vision of the two states, a government that shows determination to change the situation, and Israel is not going to miss this opportunity," she said.

Nevertheless, she added, any progress will be conditional on the PA's ability to control the territory and fulfill its security obligations. Defense Minister Ehud Barak echoed this message during his meeting with Rice.

Rice also met with President Shimon Peres, who said afterward that the U.S. is leading Israel closer "than ever before to the conclusive chapter of the negotiations with the Palestinians."