Sharon and Bush reach their own settlement on Israel

Palestinian anger after strategic deal allows Israel to retain Arab land

Ariel Sharon, the Israeli Prime Minister, secured a decisive shift in US policy on the Middle East as he won pivotal backing last night from George Bush for his plan to disengage from Gaza and a handful of settlements in the West Bank.

While hailing the plan as a "historic and courageous act" which would provide a new opportunity to revive the peace process, President Bush publicly tilted policy towards the Sharon government by indicating for the first time that Israel could retain some of its biggest settlements on the West Bank in any final peace deal with the Palestinians.

At the same time, Mr Bush made it explicitly clear that any final deal would not provide for refugee families displaced by the 1948 war to return to Israel. Instead, he said, they could return to the Palestinian state which he insisted could still emerge from a revived peace process.

In a statement, Tony Blair said: "I welcome Prime Minister Sharon's announcement that Israel intends to withdraw the Israeli Defence Forces from the Gaza Strip and dismantle all Israeli settlements there as well as some in the West Bank."

The US President was careful to make it clear that the exact borders between a Palestinian and an Israeli state were a matter for "final status" negotiations. But in a clear sign that he did not expect the borders to conform exactly with those that existed between 1949 and 1967, he said that "realities on the ground and in the region have changed greatly" in recent decades, and that would have to be recognised in any peace deal.

This goes a long way to meeting Mr Sharon's desire for an acknowledgement that the five biggest settlements on the Palestinian side of the 1967 border would remain in Israeli hands in perpetuity. In an implicit reference to a similar - but private - endorsement offered by the former US president Bill Clinton to Mr Sharon's predecessor, Ehud Barak, in abortive negotiations in 2000, Mr Bush said that had been recognised in previous peace negotiations.

Even moderate Palestinian leaders are likely to argue that was part of a proposal the Palestinians had rejected and that Mr Bush's endorsement pre-empts an important bargaining element in any future talks. Before the Sharon-Bush talks got under way, the Palestinian leadership denounced the concessions. A statement from Yasser Arafat, the Palestinian leader, said the agreement between the Mr Bush and Mr Sharon on the border issue would "lead to the destruction of the chances for the peace process and security and stability in the region. It will also restart the vicious cycle of violence in the region and end all the agreements and commitments that have been signed."

Mr Arafat's statement was sharply negative about the Gaza withdrawal plan, dismissing it as little more than a project to turn the territory into a "big prison" because Israel aims to control borders as well as air and sea access. He added: "This deal which Sharon is seeking will take place at the expense of the Palestinian people and without the knowledge of the Palestinian people's legitimate leadership."

An apparently well-satisfied Mr Sharon said at the White House last night that his disengagement plan would create "a new and better reality for the state of Israel" and emphasised it would improve the country's security and economy.

Mr Sharon is now expected to launch his campaign to win support for the disengagement plan in a referendum of 200,000 Likud Party members. The date for the referendum had been set for 29 April but it has now been deferred to 2 May because it would have coincided with the national basketball finals. A low turnout could favour opponents - backed by the main settlers' organisation.

Assuming that the referendum approves the strategy, the two extreme-right coalition partners in the government, the National Union and the National Religious Party, are expected to walk out, leaving the way clear for the Labour Party under Shimon Peres to join a new national unity government under Mr Sharon.

Some more left-wing Labour Knesset members are resisting such a move, but Mr Sharon is confident enough of them will back a new administration.