Palestinians and Israelis have agreed to produce a peace deal by the end of next year.

President George W Bush made the announcement at the US-sponsored international conference on the Middle East in Annapolis, Maryland.

More than 40 Arab leaders and international envoys are taking part, including former prime minister Tony Blair.

Negotiations will begin within weeks to establish "a democratic Palestinian state that will live side by side with Israel in peace and security", President Bush said.

The agreement was reached after weeks of intense negotiations and it was not clear until Mr Bush stepped to the podium that the two sides would come together on how to move forward on the path toward peace.

"Today, Palestinians and Israelis each understand that helping the other to realise their aspirations is the key to realising their own, and both require an independent, democratic, viable Palestinian state," he said.

"Such a state will provide Palestinians with the chance to lead lives of freedom, purpose and dignity. And such a state will help provide Israelis with something they have been seeking for generations: to live in peace with their neighbours."

His speech followed a trilateral meeting with both Palestinian President Mahmoud Abbas and Israeli Prime Minister Ehud Olmert.

He said: "Achieving this goal will not be easy - if it were easy, it would have happened a long time ago."

Mr Olmert said: "This time it's different, because we are going to have lots of participants in what I hope will launch a serious process of negotiations between us and the Palestinians.

"This will be a bilateral process, but the international support is very important for us."

Mr Abbas called the conference "a great initiative".

"I am delighted to have the opportunity to meet with President Bush after his invitation and this historic initiative that he launched to convene the Annapolis Conference," Mr Abbas said.

"We have a great deal of hope that this conference will produce permanent status negotiations, expanded negotiations, overall permanent status issues that would lead to a peace agreement between Israel and the Palestinian people, an agreement to secure security and stability."

The conference is the first time in years that Israel, a large group of Arab states and international envoys from around the world will sit down together to try to relaunch a peace process.

Tony Blair is there in his role as Middle East envoy for the Quartet of Europe, Russia, the UN and the US.

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