In recent weeks Washington had increased pressure on Israel's government to jumpstart the peace process and endorse a two-state solution which is widely accepted by the international community and by previous Israeli governments.

But in his election campaign Mr Netanyahu pledged a freeze on peace talks and his coalition government is held together by opposition to a Palestinian state.

In his speech at Bar Ilan University, a bastion of Israel’s right-wing establishment, Netanyahu accepted for the first time the notion of a Palestinian state, but with conditions attached: a public Palestinian acceptance of Israel as the nation-state of the Jewish people (giving up the right of return of Palestinian refugees), and a complete demilitarisation of any future Palestinian entity, which will not control its airspace or be allowed to bring in weapons.

The small concession (statehood) is countered by his declarations on Jerusalem, as the undivided capital of Israel (which Palestinians want to share), and on Jewish settlements in the Occupied Territories, which must be allowed to continue.

This latter point runs against what US President Barack Obama had said in his speech to the Muslim world in Cairo where he explicitly called for a stop to the settlements.

Saeb Erekat, chief Palestinian negotiator, slammed the speech.

“The peace process has been moving at the speed of a tortoise. Tonight, Netanyahu has flipped it over on its back,” he said.

In Gaza, Hamas spokesman Sami Abu Zuhri described the speech as “racist” and called on Arab nations to “form stronger opposition” towards Israel.

Similarly, Netanyahu’s small opening was greeted with lukewarm applause among the audience at Bar Ilan.

As Netanyahu spoke, two small groups of protesters demonstrated at the university's entrance.

Several dozen hard-liners held up posters showing Obama wearing an Arab headdress and shouted slogans against giving up West Bank territory. Across from them, a few dozen dovish Israelis and foreign backers chanted slogans including “two states for two peoples” and “stop the occupation.”