Bush tells Arafat it's time to go

President Bush told the Palestinians yesterday to abandon terrorism, to replace Yasser Arafat as leader and to create a functioning democracy, as conditions for a process that could lead to an independent Palestinian state within three years.

"Peace requires a new and different Palestinian leadership, so that a Palestinian state can be born," Mr Bush said in a speech setting out Washington's blueprint for a lasting Middle East peace. "I call on the Palestinians to elect new leaders who are not compromised by terrorism."

In a 15-minute address in the White House rose garden, Mr Bush set out his vision of two states, Israel and Palestine, living in peace and security. But he set the bar for the Palestinians very high, insisting on a new democratic constitution, an end to corruption, a revamped security service and an overhauled independent judiciary.

Reform must consist of more than "cosmetic changes or a veiled attempt to preserve the status quo", he said, in words that will delight Ariel Sharon. Israel's Prime Minister has long made clear he will have no truck with Mr Arafat, whom he accuses of encouraging suicide bombings that have traumatised Israelis.

The speech was warmly welcomed in Israel where it was seen as endorsing Mr Sharon's aggressive attitude towards the Palestinian leadership. The speech may also be taken as a sign by Mr Sharon that he is free to unleash his forces on Mr Arafat again without an restrictions on causing him direct harm.

In a statement that ignored the call for him to go,the Palestinian leader welcomed Mr Bush's speech as a "serious effort to push the peace process forward" But Saeb Erekat, the chief Palestinian negotiator, said: "President Yasser Arafat was directly elected in a free and fair election ... The world and President Bush must respect the democratic choice of the Palestinian people. Palestinian leaders don't come by parachute from Washington."

Mr Bush did not directly address the core problems of the dispute – the final borders of the two states, Israeli settlements in the West Bank and Gaza, the status of Jerusalem and the right of return of Palestinian refugees. These would be left to negotiations between the parties under which Israel would end the occupation that began in 1967.

The final agreement would be based on UN resolutions 242 and 338, calling for secure and recognised borders. Mr Bush said a comprehensive deal could be reached within three years. Elections for a new legislature might be held by the end of the year and US officials said they envisaged the Palestinians attaining provisional statehood within 18 months. In the short term, once the violence subsided, Israel should retire to the position it held before September 2000, when the present intifada began.

At the same time, international aid would be stepped up. If it was intolerable for Israel to live in terror, "it is untenable for Palestinians to live in squalor and occupation", Mr Bush said.

In London, the Foreign Office said a response would be issued this morning. Ministers may be uneasy at the President's blunt call for the removal of Arafat: the Foreign Office recently described him, as the head of the Palestinian authority, as the "key interlocutor for the Israelis on the peace process". However, the Government will welcome his apparent engagement in the Middle East crisis and his support for a Palestinian state.