Negotiations between Israel and the Palestinians will resume next month on the basis of an understanding that the establishment of a Palestinian state will be officially announced in two years.

Palestinian and European Union sources told Haaretz that talks will initially focus on determining the permanent border between Israel and the West Bank.

Due to the Palestinians' reservations over establishing a state with temporary borders, as was proposed during the second stage of the road map, this step will probably be defined as "early recognition" of Palestine.

It is understood that this will be accompanied by a public American and European declaration that the permanent border will be based on the border of June 4, 1967. Both sides may agree to alter the border based on territorial exchanges.

Prime Minister Benjamin Netanyahu's refusal to discuss Jerusalem and the Palestinian refugees in the initial negotiation stages will not be allowed to delay the announcement of an independent Palestinian state.

Likewise, Netanyahu's demand that the Palestinians recognize Israel as the nation-state of the Jewish people, and that the Arab world embark on normalizing ties with Israel, will not constitute preconditions to an "early recognition" of Palestine.

A Palestinian source said Palestinian Authority President Mahmoud Abbas has decided that the chief negotiator at the Palestine Liberation Organization, Dr. Saeb Erekat, will lead the Palestinian negotiating team.

Abbas may also hold private meetings with Prime Minister Netanyahu at the same time, as he did with Netanyahu's predecessor, Ehud Olmert.

Netanyahu said last week in private talks that the differences with the Americans over the settlements now center on whether the freeze in construction will last nine months, as he is proposing, or a full year, which is what the Americans are asking.

The prime minister said he was confident that a compromise would be reached in the coming days, possibly during a meeting scheduled with U.S. special envoy to the Middle East, George Mitchell, who arrived in Israel last night.

An agreement with the Americans on the issue of settlement construction is expected to pave the way for a tripartite meeting in New York between Abbas, Netanyahu and U.S. President Barack Obama at the UN General Assembly.

Meanwhile, a senior diplomatic source said yesterday that the proposal of the European Union High Representative for the Common Foreign and Security Policy, Javier Solana, that the United Nations accept Palestine as a full member within two years, was made with the support at the highest levels of the U.S. administration.

The plan is based, among others things, on ideas President Shimon Peres recently put before Netanyahu and foreign leaders, including Egyptian President Hosni Mubarak, as well as Mitchell and Spanish Foreign Minister Miguel Moratinos. During those conversations, Peres referred to the Prime Minister of the Palestinian Authority, Salam Fayyad, as a "Palestinian Ben-Gurion."

The Israeli president was referring to Fayyad's plan to build the infrastructure for a Palestinian state and to declare its independence as a state de facto, in two years.

Netanyahu has not yet commented on Fayyad's plan.