Israeli and Palestinian leaders have agreed to start talks aimed at reaching a full peace deal by the end of 2008.
Opening a Middle East peace conference, US President George W Bush said all outstanding issues dividing the two sides would be on the table.
Palestinian Authority President Mahmoud Abbas said the talks must include the status of Jerusalem as a Palestinian capital, and the future of refugees.
Israeli PM Ehud Olmert said Israel was prepared to make compromises for peace.
Standing before the diplomats from more than 40 countries and international agencies at the US naval academy at Annapolis, Maryland, President Bush stepped back to allow the Palestinian and Israeli leaders to shake hands.
"We agree to engage in vigorous, ongoing and continuous negotiations and shall make every effort to conclude an agreement before the end of 2008," Mr Bush said, reading from a statement agreed by the two sides.
He said the first negotiations would start on 12 December, with further meetings to be held every two weeks after that.
He committed himself to spending the rest of his presidency - until January 2009 - working towards "an independent democratic viable Palestinian state".
"Such a state will provide Palestinians with the chance to lead lives of freedom, purpose and dignity," Mr Bush said.
"And such a state will help provide Israelis with something they have been seeking for generations: to live in peace with their neighbours."
Mr Abbas followed with his own speech, saying: "We have to start comprehensive and deep negotiations on all issues of final status, including Jerusalem, refugees, borders, settlements, water and security and others".
He said East Jerusalem should be the capital of the new Palestinian state, something deeply opposed by many Israelis who regard it as part of their own capital.
Mr Olmert said he had come to Annapolis despite the obstacles posed by continuing violence against the people of Israel.
But he added that the "time has come... we want peace".
Mr Olmert agreed that all the core issues dividing the two sides would be on the table, and that Israel would assist Palestinian refugees find a future in the new Palestinian state. ( BBC )