French President Nicolas Sarkozy has called for an end to Jewish settlement construction on Palestinian land, in an address to Israeli MPs, reported BBC.
He told the Israeli Knesset that without this there would be no lasting peace in the Middle East.
On the first French state visit to Israel in 12 years, he said a peace agreement would allow the two peoples to live in peace and security.
Mr Sarkozy also told MPs that France would not accept a nuclear-armed Iran.
Earlier on Monday the French president and his wife Carla Bruni-Sarkozy visited the Yad Vashem Holocaust memorial, where he rekindled the eternal flame.
Mr Sarkozy has met Israeli leaders and will go on to hold talks with top Palestinians.
"There can be no peace without stopping settlement," Mr Sarkozy told members of the Knesset.
He encouraged Israel to support a proposal, "backed by many members of your Knesset", for the adoption of a law that would encourage settlers to leave the West Bank in exchange for compensation and relocation in Israel.
Israel is pushing ahead with plans to build hundreds more homes in the occupied West Bank, infuriating Palestinians and drawing international criticism.
The French president also called on Israel to ease restrictions on Palestinians' movement within the West Bank.
But he acknowledged that "the Israeli people have the right to live in security", and declared: "There can be no peace if Palestinians themselves do not combat terrorism."
And, addressing one of the most contentious issues in the conflict, he said a lasting peace settlement had to recognise Jerusalem as the capital of both Israel and Palestine.
Correspondents say the French president's admiration for Israel is in contrast to his predecessor, Jacques Chirac, who was widely seen as pro-Arab.
Mr Sarkozy was greeted on his arrival at Ben Gurion airport near Tel Aviv on Sunday by Israeli Prime Minister Ehud Olmert and Israeli President Shimon Peres.
Speaking at the airport, Mr Sarkozy said: "I have always been and will always be a friend of Israel...
"An agreement is possible, tomorrow, and that agreement would allow the two peoples to live side-by-side in peace and security."
"I am more convinced than ever that the security of Israel will only be truly guaranteed with the birth of a second state, a Palestinian state."
From the airport, France's first couple headed to Jerusalem for talks with Mr Peres, followed by dinner with Mr Olmert.
After addressing the Knesset, Mr Sarkozy plans to travel to the West Bank town of Bethlehem for talks with Palestinian Authority President Mahmoud Abbas on Tuesday.