Bush's comments came as Palestinian Prime Minister Mahmoud Abbas stood by his side in Washington.

"I think the wall is a problem and I've discussed that with (Israeli prime Minister) Ariel Sharon," Bush said at a joint conference with Abbas.

"It is very difficult to develop confidence between the Palestinians and Israel with a wall snaking through the West Bank," he added.

When it is completed the apartheid wall will be 1000 kms long, 30 times the length of the old Berlin Wall which separated East and West Germany.

The first part of the wall has already swallowed up large chunks of Palestinian territory, widening the intractable land dispute. Palestinians also claim that once it is built the wall will prevent them from entering Israel to work and trade.

Rejection

Bush rejected a key Palestinian demand, the release of all Palestinian prisoners, saying he would not ask Israel to free those "who would then commit terrorist actions".

The American president said the prisoner issue should be dealt with on a case by case basis. 

"Surely, nobody wants to let a cold-blooded killer out of prison that would help derail the process," he said.

Financial aid

Abbas appealed to Bush to make a significant financial commitment to the Palestinian Authority without specifying an amount.

The prime minister who was imposed on the Palestinian Authority by the US earlier this year is the highest-ranking Palestinian official to visit the White House since Bush came to power.

Bush pledged to boost economic ties with the Palestinian Authority saying: "We must improve the daily lives of ordinary Palestinians."

The president said he would send his treasury and commerce secretaries to the Middle East this autumn to assess the US assistance needed.

The secretaries would report back on "the steps we need to take to build a solid economic foundation for a free and sovereign Palestinian state."

Bush also disclosed plans to set up a joint US-Palestine economic development group.

The goal of the group would be to bring about practical ways to create job opportunities for Palestinians and growth and investment to the Palestinian economy, according to Bush.

Earlier this month, the White House granted $20 million to the Palestinian Authority to improve basic services in Palestinian areas that were recently evacuated by Israeli forces.

The grant came without the approval of the Congress, which prohibits direct financial assistance to the Authority.

"We are particularly grateful for the $20 million of direct assistance to Palestinian Authority," Abbas said. 

Abbas called on the Congress to remove the ban on direct US aid to the Authority.

"And we hope that this assistance increases and is enshrined in legislation," he said.

Meanwhile, Sharon's office issued a statement pledging to pull out from two West Bank cities and remove several main roadblocks in the area.

The statement said the moves Israel had planned to take would "advance negotiations" with the Palestinian Authority on implementing the US-sponsored "road map".