Bush to recommend Ramallah as capital of Palestinian state

President George Bush is expected to recommend this week that Ramallah be established as the capital of an interim Palestinian state.

But while officials say the West Bank town is the most likely option for a base for the Palestinian Authority's infrastructure while negotiations continue, Mr Bush is expected to defer the most three difficult questions facing any permanent settlement: the borders of a future state, the status of Jerusalem and the right of return for Palestinian refugees.

With little progress being made in the region towards a deal, there is much expectation surrounding Mr Bush's proposals, which he could announce tomorrow, having spent the weekend discussing the issue with his national security team. Among them was the National Security Adviser, Condoleezza Rice, who received an angry reaction from the Palestinian leader, Yasser Arafat, when she said the Palestinian Authority was "corrupt and cavorts with terror".

Mr Arafat has responded to American and Israeli criticism by announcing that the Palestinians would hold legislative and presidential elections in December or January, and by condemning suicide bombings in Israel. He criticised Ms Rice's most recent comment, saying: "We are implementing only what our people want us to do and we do not take orders from anyone."

The Palestinian leader also criticised Israel's building of a security fence along the border with the West Bank, condemning it as an "act of racism". He added: "It is a sinful assault on our land, an act of racism and apartheid which we totally reject."

Such rhetoric is not likely to go away once Mr Bush announces his proposals. According to reports, the Israeli Prime Minister, Ariel Sharon, opposes establishing any sort of Palestinian state at the moment. He told The New York Times: "The Bush administration knows very well our position. It is premature now until the full cessation of terror and its incitement, and until there is real reform. I was willing to discuss a ceasefire under fire, but I cannot discuss political developments under fire. Many things must happen before that is discussed."

All sides accept that establishing an interim state will be weighed with problems and difficult decisions, including dealing with such issues as whether the Palestinians should be granted full membership of the UN instead of "permanent observer" status.

The former US ambassador to Israel, Martin Indyk, told The Los Angeles Times: "It's not going to be like any kind of state in the remaking, like Afghanistan. It's not going to be like a state in the making like East Timor. Both had either formal or informal trusteeships over them. The international community came in, in one form or another, and oversaw the process of building the state or rebuilding it."

Dennis Ross, a former special Middle East envoy, said: "It doesn't matter whether the idea is an interim state or a final state or different variations in between – if the realities on the ground don't change then we won't have a chance to pursue any of them."