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U.S. President George W. Bush implored government ministers Thursday to stay behind Prime Minister Ehud Olmert, urging them to keep him in power.

At a dinner held in his honor at the Prime Minister's Residence in Jerusalem, Bush referred to the prime minister as a strong leader, adding that he holds him in high regard. Bush arrived in Israel for a three-day on Wednesday.

The comments come amid concerns the coalition government could collapse should Olmert make far-reaching concessions to the Palestinians.

Industry, Labor, and Trade Minister Eli Yishai (Shas) told Bush that he is "not willing to compromise on Jerusalem." Yishai recited several psalms that emphasize the importance of the holy city.

"We cannot make peace with half of the Palestinian nation, which is all that is ruled by Palestinian Authority Chairman Mahmoud Abbas," Yishai added.

"We saw what happened when we left Gaza," Yishai said. "We cannot accept a similar situation tomorrow in the West Bank. Hamas entered every place we left. We cannot compromise on Israel's security. The problem with Hamas is that it wants to destroy Israel."

Yishai gave the visiting American president a letter from Shas spiritual leader Ovadia Yosef urging the release of convicted spy Jonathan Pollard, as well as a letter from Pollard's wife Esther.

Yishai raised the issue of Pollard's release, sentenced to life imprisonment for selling military secrets to Israel, despite the fact that Olmert had explicitly asked the ministers to refrain from doing so.

Bush: Palestinian state is solution to refugee issue

Earlier Thursday, Bush laid out his vision for resolving some of the most contentious issues dividing Israelis and Palestinians, including the matter of Palestinian refugees, which he said would be resolved by the creation of a Palestinian state and compensation.

"I believe we need to look to the establishment of a Palestinian state and new international mechanisms, including compensation, to resolve the refugee issue," said Bush, in a statement summing up two days of meetings with Israeli and Palestinian leaders.

"There should be an end to the occupation that began in 1967," continued Bush. "The agreement must establish Palestine as a homeland for the Palestinian people, just as Israel is a homeland for the Jewish people."

"These negotiations must ensure that Israel has secure, recognized, and defensible borders," he said. "And they must ensure that the state of Palestine is viable, contiguous, sovereign, and independent."

The U.S. president reiterated a previous commitment he gave to then prime minister Ariel Sharon, saying Israel should not be expected to withdraw fully from territory captured in the Six-Day War.

"While territory is an issue for both parties to decide, I believe that any peace agreement between them will require mutually agreed adjustments to the armistice lines of 1949 to reflect current realities and to ensure that the Palestinian state is viable and contiguous," he said.

He offered no specifics to resolve the conflicting claims to Jerusalem, but urged both sides to work toward a solution. "I know Jerusalem is a tough issue," Bush said. "Both sides have deeply felt political and religious concerns."

"I fully understand that finding a solution to this issue will be one of the most difficult challenges on the road to peace, but that is the road we have chosen to walk," he added.

The president said Israel and the Palestinians must both live up to their commitments under the long-dormant road map for peace.

"On the Israeli side that includes ending settlement expansion and removing unauthorized outposts," Bush said. On the Palestinian side that includes confronting terrorists and dismantling terrorist infrastructure ... no agreement and no Palestinian state will be born of terror."

Bush added that the sides should be able to reach an agreement by the end of 2008, as they agreed to do at the U.S.-hosted Middle East peace conference in Annapolis in November.

"A peace agreement should happen and can happen by the end of this year," said the American president. "I know both leaders share this important goal and I am committed to helping both sides achieve it."

Within minutes, Bush's national security adviser Stephen Hadley said the president would return to the Middle East at least once and maybe more over the next year. He wouldn't elaborate on possible destinations.

Bush also called on Arab states to reach out to Israel, saying this was "long overdue."

Bush names U.S. General as new road map monitor

Bush earlier named Lt. Gen. William Fraser to monitor the Israeli-Palestinian "road map" for peace, the White House said Thursday.

Fraser, who has served as assistant to the Chairman of the Joint Chiefs of Staff, will "help monitor road map commitments", White House spokesman Gordon Johndroe said.

The U.S. president met with Palestinian President Mahmoud Abbas in Ramallah earlier in the day, telling a press conference that he is confident that the Israelis and the Palestinians will reach a peace deal in 2008.

"In order for there to be lasting peace, President Abbas and Prime Minister Olmert have to come together and make tough choices," Bush said at a joint press conference with Abbas.

"And I'm convinced they will. And I believe it's possible - not only possible, I believe it's going to happen - that there be a signed peace treaty by the time I leave office [in January 2009]. That's what I believe."

Bush spent much of Thursday in the West Bank, including a pilgrimage to Jesus' traditional birth grotto in biblical Bethlehem.

The president arrived at Abbas' headquarters on Thursday for his first-ever visit to the Palestinian territories. Abbas greeted Bush as he emerged from his car in the walled compound. The two men walked side by side along a red carpet, flanked by Palestinian security in olive-and-gold uniforms.

He also accused terrorists of trying to ruin Palestinian hopes for statehood.

Abbas "knows that a handful of people want to dash the expectations of the Palestinian people," he said. "I appreciate your [Abbas'] understanding that the way to achieve peace is to offer an alternative vision of liberty."

The president said that the Americans are "very much engaged" in peace negotiations. "I am confident that with proper help, the state of Palestine will emerge... I am confident that the status quo is unacceptable, Mr. President," he said to Abbas.

Responding to a question about West Bank settlements, Bush said that "each side has got obligations under the road map... we have made our concerns about the expansion of settlements known."

Under the U.S.-backed road map for peace, Israel must halt the expansion of settlements in the first phase, and Palestinian security services must counter terrorism.

"I believe Palestinian security forces are improving... my message to the Israelis is that they ought to help, not hinder, the modernization of the Palestinian security forces," Bush said.

Abbas: Palestinians seek a state with Jerusalem as its capital

Abbas said that he and Bush agreed on the points they raised during the meeting. During the press conference, he spelled out Palestinian demands, saying that his people seek a state with "Jerusalem as its capital and an end to the refugee problem, in accordance with UN decisions."

"The Palestinian people, who are committed to peace, want to move freely in their country, with no roadblocks, [separation] fence or settlements... We want to see a different future, without thousands of prisoners in jail and innocent deaths. We want to stop the closure," Abbas continued.

In response to a question on Israel Defense Forces checkpoints in the West Bank, designed to prevent terror attacks on Israelis targets but which hinder Palestinian freedom of movement, Bush said he identified with both sides' positions.

He said that the Israelis "don't want a state on their border on which attacks can be launched. I can understand that... The checkpoints create security for Israel and they create frustrations for Palestinians."

On the Gaza Strip, which is under the control of the extremist Hamas movement since a bloody June takeover, Bush said that "there is a competing vision taking place in Gaza."

"Hamas... has delivered nothing but misery. I'm convinced his [Abbas'] government will yield a hopeful future."

Abbas echoed the sentiments, saying, "Hamas has to retreat from its coup, then we can talk."

Ahead of the visit, Palestinian police sealed off streets and erected checkpoints in large parts of the city, and residents in nearby buildings were told to stay away from windows and balconies. Palestinian security officials said U.S. snipers were being deployed in the area.