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PARIS - Palestinian refugees should be resettled in a Palestinian state, not in Israel, French President Nicolas Sarkozy told Prime Minister Ehud Olmert yesterday.

"Each side should have its own nation-state," he said, according to Israeli officials who were present at the two leaders' meeting. "It is not reasonable for the Palestinians to demand both an independent state and also the refugees' return to the state of Israel, which even today has a minority of one million Arabs."

Sarkozy, who hosted Olmert at the Elysee Palace, expressed strong support for Israel, describing its establishment as "a miracle" and "the most significant event of the 20th century."

"They say that I support Israel because my grandfather was Jewish, but this isn't a personal matter," he continued, according to the Israeli sources. "Israel introduces diversity and democracy to the Middle East. It's a miracle that out of the remnants of the ... scattered Jewish people, such a state has arisen."

"Israel's security is a clear red line, which is not up for negotiation," he added. "That is an inviolable condition, which we will never concede."

Olmert and Sarkozy initially met in a small forum, with one aide apiece present. The focus of those talks was Iran's nuclear program. Olmert told Israeli reporters afterward that "on the Iranian issue, I could not have heard statements that better satisfied my expectations."

He said that he and Sarkozy did not discuss a military attack against Iran.

"There's a broad spectrum of measures between the extremes of capitulation and military action," he said, adding that he believes there is a possibility of intensified sanctions against Iran via both the UN Security Council and the European Union. Sarkozy supports expanded sanctions, and the two leaders discussed how to persuade Germany, Italy and Spain to go along.

Olmert believes that existing sanctions, which target Iran's economy and banking system, have already had an effect. "We need to prevent Iranian businessmen from doing business, until the class that controls the Iranian economy does something against the regime," he said in a conversation with French journalists after his meeting with Sarkozy.

After their talks on Iran, the two leaders met in a larger forum, with more aides present. These talks focused mainly on the Palestinian issue, and especially the upcoming peace conference in Annapolis.

Sarkozy urged Olmert, who briefed the president on his talks with Palestinian President Mahmoud Abbas, to make additional gestures to the Palestinians. "The prisoner release was very important," he said, referring to Israel's release of two batches of Palestinian prisoners over the past few months. Both were billed as goodwill gestures to Abbas.

France, Sarkozy continued, wants to be involved in advancing an Israeli-Palestinian agreement. It will attend the Annapolis conference, and will also host a meeting of donor states to the PA in Paris on December 17.

After the meeting, Sarkozy's spokesman said that "the minute Israel's security is assured, it will be possible to display creativity toward the Palestinians."

In his comments to French journalists, Olmert also insisted that his coalition was not at risk of unraveling over the Annapolis conference.

Two rightist ministers, Avigdor Lieberman of Yisrael Beiteinu and Eli Yishai of Shas, have threatened to take their parties out of the government if the conference, due to convene in in late November or December, tackles final-status issues such as borders, Jerusalem and the refugees.

"I don't see any political difficulty with this," Olmert told the reporters. "I gather from my meetings with coalition partners that the coalition is cohesive and stable."

This morning, Olmert will head to London for a meeting with British Prime Minister Gordon Brown, their first since Brown took office. The talks will focus on Iran and the Palestinian issue. In addition, Olmert will ask Brown to work to change the law that enables Israel Defense Forces officers to be indicted in Britain for alleged war crimes.

This evening, before heading back to Israel, Olmert will meet with Turkish Prime Minister Recep Tayyip Erdogan, who is also in London. Turkey has also expressed interest in helping Israeli-Palestinian negotiations; in addition, it has sought Israel's help in blocking a proposed resolution the U.S. House of Representatives that defines Turkey's massacre of Armenians in 1915 as genocide.

Reuters contributed to this report