RAMALLAH, West Bank- Palestinians voiced dismay on Monday over terms Benjamin Netanyahu set for a peace accord but the Israeli prime minister won U.S. and European praise over his conditional acceptance of Palestinian statehood.

In a speech on Sunday, Netanyahu responded to weeks of U.S. pressure by endorsing for the first time establishment of a Palestinian state, on condition Israel received international guarantees in advance the new nation would be demilitarized.

But Palestinians were disappointed by Netanyahu's demand they first recognize Israel as a Jewish state and his failure to halt Jewish settlement expansion in the occupied West Bank.

The international community should confront this policy, through which Netanyahu wants to kill off any chance for peace, Yasser Abed Rabbo, an adviser to Palestinian President Mahmoud Abbas, told Reuters.

They must isolate and confront this policy which Netanyahu is adopting and exert pressure on him so that he adheres to international legitimacy and the road map, he said, referring to a U.S.-sponsored 2003 peace plan.

Egyptian President Hosni Mubarak said in remarks to Egypt's military that the call to recognize Israel as a Jewish state increases the complexity of the matter (of achieving peace) and aborts the chance for peace.

Palestinians fear that granting such recognition would effectively rule out any return of Palestinian refugees to what is now Israel.

The White House termed Sunday's address an important step forward for implementing President Barack Obama's peace vision.

The European Union described the speech as a step in the right direction but said it was not enough to raise EU-Israel ties to a higher level.

DIFFERENCES

Interviewed on U.S. television on Monday, Netanyahu said he hoped to narrow differences with Obama over settlements.

Obama has called for a full settlement freeze, in line with the road map, but Netanyahu wants building to continue in existing West Bank enclaves.

President Obama and I are trying to reach a common understanding on this, Netanyahu said on NBC's Today Show. I think we'll find some common ground.

Netanyahu pledged to keep all of Jerusalem as Israel's capital -- defying Palestinians' claim on the city -- and hedged on whether Israel would ever remove West Bank settlements.

He ruled out the admission of Palestinian refugees to Israel proper and said Abbas must impose his authority over the breakaway Hamas Islamists ruling the Gaza Strip.

Palestinian negotiator Saeb Erekat said mediators should challenge Netanyahu on whether he was prepared to tackle territorial issues such as borders, Jerusalem and settlements.

Netanyahu is talking about negotiations about cantons -- the canton of the state of Palestine, with a flag and an anthem, a state without borders, without sovereignty, without a capital, Erekat said.

Netanyahu's speech met circumspection across the political spectrum in Israel, which has seen almost two decades of stop-start talks about a two-state solution, a concept the right-wing Likud party chief had long balked at endorsing.

Several Likud legislators accused Netanyahu of violating party policy, but a full-scale rebellion appeared unlikely and Likud cabinet ministers did not break ranks.

(Additional reporting by Washington bureau, Adam Entous and Dan Williams in Jerusalem, Mohammed Assadi in Ramallah and Mark John in Luxembourg, Writing by Dan Williams; Editing by Louise Ireland and Janet Lawrence)

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