Netanyahu also said that while Israel had no intention of building new settlements or of expropriating additional land for existing settlements there was a "need" to permit "natural growth" of settlements.

The speech was cautiously welcomed by the US, with Barack Obama, the US president, saying it was a "positive movement" that paved the way for "serious talks", although the he reiterated a US demand for a halt to settlements.

However Palestinian angrily rejected the demands, saying that Netanyahu's speech "closed the door to permanent status negotiations".

"We ask the world not to be fooled by his use of the term Palestinian state because he qualified it. He declared Jerusalem the capital of Israel, said refugees would not be negotiated and that settlements would remain," said Saeb Erekat, Palestinian senior negotiator, after the speech.

'Meaningful steps'

Lieberman's visit, in which he will also meet senior US politicians, including Democratic senators John Kerry and Joe Lieberman, also follows remarks by George Mitchell, the US Middle East envoy, in which he said he hoped that full peace talks between the Palestinians and Israelis could begin within weeks.

"We are asking all parties to take meaningful steps," Mitchell said, following four trips to the Middle East where he has met the Israeli and Palestinian leaders as well as the leaders of other Arab countries, including Syria.

"For the Israelis, that means a stop to settlements and other actions. For the Palestinians, that means continuing their efforts to take responsibility for security and end incitement," he said.

"We are also asking the Arab countries to take meaningful steps toward peace and normalisation."

'Irreconcilable'

Mitchell also said that Washington did not see the goals of a demilitarised Palestinian state and a viable state as "irreconcilable".

On Iran, Mitchell said concerns shared by Israel and Sunni Arab countries over Shia Muslim Iran's nuclear programme and growing power in the region created "unique' circumstances for peace.

"The threat from Iran creates a circumstance unique in the region's history in establishing the possibility of a common interest between nations who for so long have been in an adversarial position," he said.