The Group of Eight industrialized nations on Thursday outlined a vision of two states, Israel and Palestine, within secure borders in the Middle East, but said the Palestinians needed free and fair elections as well as economic and institutional reforms.
"We stressed our commitment to work for peace in the Middle East, based on our vision of two states, Israel and Palestine, living side by side within secure and recognized borders," the G8 - Britain, Canada, France, Germany, Italy, Japan, Russia and the United States - said in a statement.
"We agreed on the urgency of reform of Palestinian institutions and its economy, and of free and fair elections."
Bush plays down differences over Arafat leadership at G8 summit
Earlier Thursday, U.S. President George W. Bush played down resistance to his call for the removal of Palestinian Authority Chairman Yasser Arafat and said European leaders had responded well to his strategy for ending the Israeli-Palestinian conflict.
"The response has been positive and for that I'm grateful," Bush said during a meeting with Russian President Vladimir Putin on the sidelines of the G8 summit. "The reason why is most European leaders understand something has to change in order for there to be peace, and that starts with free elections, a new constitution, transparency, rule of law amongst the Palestinians. And that's the hopeful way to get to where we need to get, which is two states living side-by-side in peace," Bush added.
Backing the U.S. call, Italian Prime Minister Silvio Berlusconi said Thursday that Palestinian leader Yasser Arafat should book himself a place in history and stand down.
Berlusconi, who has forged close ties with the Arab world since taking office last year, told reporters the international community was ready to help Palestinians as long as they set up a transparent democracy.
"Many people are convinced that Arafat, a winner of the Nobel peace prize, should make a generous gesture and move aside," Berlusconi said on the final morning of a two day meeting of major power leaders.
"If I were President Arafat I would make a grand gesture that would enable him to go down forever in history as the man who gave everything for the freedom of his country," he said.
But German Chancellor Gerhard Schroeder insisted that Arafat remained a viable dialogue partner, saying: "As long as he is president of the Palestine Authority, it will remain this way."
Schroeder underlined that G8 discussions had also focused on improving the organization of the Palestinian administration. "Democratic structures are more important from the Palestinian perspective than any individual," the German Chancellor said.
French President Jacques Chirac meanwhile insisted on the need to hold an early Middle East peace conference to bring peace to the region.
Bush told the Palestinians in his Mideast policy speech delivered earlier in the week that they must pick new leaders "not compromised by terror" as a precondition to setting up a Palestinian state.
Berlusconi said the move had "basically delegitimized the current Palestinian leadership", rendering pointless calls from some quarters for an international peace conference, he added.
G8 leaders discussed the Israeli-Palestinian crisis over supper on Wednesday night and Berlusconi said no one had lined up against Bush, although Chirac had "insisted" on the need for a new peace conference.
The Italian prime minister told reporters that the leaders had discussed the possibility of Arafat winning a fresh mandate in elections slated for January 2003, but had not come to any conclusions.
"There might be some probability of success (if) Palestinian people realize there is a huge line up of world forces ready to help concretely and in a massive fashion... if they plant on that territory a real, transparent democracy," Berlusconi said.
He added that there were well-founded suspicions the current Palestinian leadership was corrupt and backed terror groups.
Asked if wealthy nations would halt all aid to Palestinians if Arafat were re-elected, Berlusconi said: "Our discussions did not get that far."
He also left the door open to Arafat staying in power, saying Bush never mentioned the Palestinian leader by name, and indicating that the problem could lie with Arafat's entourage rather than the Palestinian president himself.
Berlusconi has presented himself as a possible mediator in the Middle East crisis and offered last month to host a peace summit in Italy. "Events have obviously moved on since then," he said on Thursday.
U.S. continues contacts with PA officials
U.S. diplomats are meeting with top Palestinian officials, even as the Bush administration calls for Arafat's ouster.
Among the diplomats is Ronald Schlicher, who heads the U.S. consulate in Jerusalem, the main contact point for the Palestinians with the United States in the absence of formal relations.
A senior U.S. official said Schlicher was likely to have "a full range of contacts" with the Palestinian Authority whether or not he sees the Palestinian leader.
Bush called Monday for Arafat's removal, saying the Palestinians should be led toward statehood by those "not compromised by terror."
Arafat subsequently denied that Bush was referring to him, and a close aide, Nabil Shaath, said Arafat would stand for re-election.
A senior U.S. official, who was with Bush at economics talks in Canada, said Wednesday that the United States would not interfere if Arafat won a free election.
But there would be consequences in the Palestinians' drive for a state, said the official, speaking on condition of anonymity. There must be a change in leadership to move forward, the official said.
Bush, meanwhile, again sought to exclude Arafat, even if he won re-election as head of the Palestinian Authority. "I meant what I said," Bush said at a news conference. "There needs to be change."
And turning up the heat on Arafat, Bush said he "won't be putting money into a society" dominated by corrupt leaders. Two senior officials said he was referring to the promise of a robust international aid package if democratic reforms are enacted by Palestinians - not the $100 million in humanitarian aid currently going to Palestinians, which they said is not in jeopardy.
At the same time, the State Department spokesman Richard Boucher said meetings with Palestinian leaders were continuing.
"We deal with the leadership, the people who are responsible and who we think have a continuing responsibility to push forward, to control the violence, to make lives safer," Boucher said.
Powell confers with Saudi foreign minister
Secretary of State Colin Powell conferred Thursday with Saudi Arabia's foreign minister on implementing President George W. Bush's proposal for a Palestinian state within three years.
They spoke on the telephone after what a U.S. senior official described as a "positive statement" by the foreign minister, Prince Saud al-Faisal, in Jiddah.
They want to move forward together, said the official, speaking on condition of anonymity.
The Saudi ambassador, Prince Bandar bin Sultan, is expected to return to his post in Washington for talks with Powell, but no meeting has been scheduled yet.
Saudi Arabia has its own peace plan, endorsed by the Arab League. It calls for Israel to withdraw from all of the West Bank, Gaza and part of Jerusalem - and does not call for the ouster of Yasser Arafat as the Palestinian leader, as Bush did on Monday.
Bush has made reform of the Palestinian Authority a precondition to U.S. support for establishing a state. Arab governments want an immediate start on negotiations between Israel and the Palestinians with the aim of establishing the state promptly and compelling Israel to relinquish territory.
But a top Palestinian official, Hassan Abdel Rahman, said it was not possible to have reform and elections under an Israeli curfew on the West Bank and "there is practically no freedom of movement for anyone."
Rahman, the senior Palestinian official in the United States, said Bush talked about his vision but did not say how to achieve his objectives.
"The situation on the ground has to be changed for any reform to be achieved," Rahman said in an interview.