Palestinian officials welcomed the statement on Monday but voiced disappointment at comments by Bush that it was unrealistic to expect a full Israeli departure from the occupied territory.
Nevertheless, they welcomed calls by the US leader for Israel to dismantle unauthorised settlement outposts and not to proceed with plans to expand a large settlement called Maale Adumim on the outskirts of occupied Jerusalem.
"We hope that Prime Minister Ariel Sharon will hear the appeal of President Bush to halt settlement activity because to continue would mean destroying the vision of two states," chief Palestinian negotiator Saib Uraiqat said.
Bush made clear in his meeting with Sharon at his Texas ranch that he saw the recently approved plan for 3500 new homes at Maale Adumim as a violation of the US-backed road map peace plan.
The US president also expressed continued frustration of Washington that Israel has torn down few of the dozens of "wildcat" settlements that are dotted across the West Bank, nearly two years after agreeing to do so when the road map was launched.
"I told the prime minister of my concern that Israel not undertake any activity that contravenes road map obligations or prejudices final status negotiations.
"Therefore, Israel should remove unauthorised outposts and meet its road map obligations regarding settlements in the West Bank," Bush said at a joint press conference with Sharon.
Dozens of settler outposts have
complicated peace negotiations
Palestinian Deputy Prime Minister Nabil Shaath said Bush's comments showed he understood that settlement expansion undermined the prospects of a "viable Palestinian state".
"I think that the president was quite positive and I think that he has a real feeling of what's important to keep this process going," Shaath told CNN.
The expansion of Maale Adumim and the continued presence of the settlement outposts was "a real threat to getting back to the peace process", Shaath added.
Bush used the summit as an opportunity to reaffirm his support for Sharon's so-called disengagement plan which will see Israel leave the Gaza Strip this summer.
Sharon is hoping that the pullout from the lesser half of a future Palestinian state will ease some of the pressure for a more complete Israeli withdrawal from parts of the West Bank.
Bush said a full Israeli withdrawal
from West Bank was unrealistic
He will likely be grateful that Bush repeated earlier assertions that it was "unrealistic" for Israeli to make a "full and complete" departure from the West Bank.
Nabil Abu Rudaina, a spokesman for the Palestinian Authority, criticised any move which he said would legitimise settlement activity.
"What is needed now is to start to apply the road map. There is no need to legitimise settlement activity, of whatever kind," Abu Rudaina told AFP.
Responding to a call from Bush to work with Israel to ensure the success of the Gaza pullout, Shaath said that "talks are going on", without giving further details.
"We are going to do everything possible so that once the Israelis withdraw, we will run it properly with security for all," Shaath said.