Details added (first version posted at 21:58)
Israeli Prime Minister Benjamin Netanyahu conceded for the first time Tuesday that some settlements in the West Bank will be dismantled, but he insisted that Jerusalem will remain united under Israel and rejected a complete return to 1967 borders, dpa reported.
Netanyahu, in a major address before a rare joint session of the US Congress, said Israel is prepared to make "painful compromises," including giving up some "ancestral Jewish homeland" in order to create a Palestinian state as part of a final peace settlement.
Netanyahu said he is willing to immediately begin negotiations with the Palestinians, but will not accept or make peace with a government that includes the radical group Hamas.
He urged Palestinian President Mahmoud Abbas to "tear up" a recent power sharing agreement between his Fatah party and Hamas.
"Israel will not negotiate with a Palestinian government backed by the Palestinian version of al-Qaeda. That we will not do," Netanyahu said.
Netanyahu said Israel plans to keep large swaths of settlements around Jerusalem and Tel Aviv, but said some other areas will fall outside of Israel's final borders through an agreement with the Palestinians.
"The status of the settlements will be decided only in negotiations. But we must also be honest," Netanyahu said. "So I'm saying today something that should be said publicly by all those who are serious about peace: In any real peace agreement, in any peace agreement that ends the conflict, some settlements will end up beyond Israel's borders."
Netanyahu said Israel will be "generous" on the size of a Palestinian state, "but we'll be very firm on where we put the border with it." He said the vast majority of the 650,000 Israelis who live on land captured by Israel in the 1967 war live in the suburbs and Jerusalem and Tel Aviv, and that land must be kept.
"These areas are densely populated, but they're geographically quite small," Netanyahu said. "And under any realistic peace agreement these areas, as well as other places of critical strategic and national importance, will be incorporated into the final borders of Israel."
Netanyahu was adamant that Israel will never allow the return of Palestinians refugees, calling the key Palestinian demand a "fantasy."
His speech marked a slightly softer tone than when he met with US President Barack Obama on Friday and flatly rejected Obama's initiative to begin negotiations by using the 1967 lines as the starting point for final Israeli-Palestinian borders.
While Obama's statement in a speech on Thursday appeared to spark a major disagreement with Netanyahu, Obama did not say the borders should be the exact ones prior to the 1967 war in which Israel captured the West Bank. Obama said both sides should agree to land swaps to account for changes on the ground over the last 44 years - a point Netanyahu acknowledged during his speech to Congress.
"As President Obama said, the border will be different than the one that existed on June 4th, 1967," Netanyahu said, while repeating his position that Israel will never go to back to the "indefensible" 1967 lines.
Netanyahu and Obama have frequently been at odds over how to resume the peace process, but Netanyahu usually finds a supportive Congress, indicated by the large applauses and cheers he received throughout his speech. The address marked the highlight of his trip to Washington that began last week and included a speaking engagement at the American Israel Public Affairs Committee, the largest pro-Israel lobbying organization in the United States.
US brokered peace talks broke off last year when an Israeli moratorium on settlement construction expired, prompting the Palestinians to withdraw from the talks. The Obama administration has criticized Netanyahu's government for not keeping the freeze in place to facilitate the peace process.