Shaul Mofaz, deputy leader of the Kadima party, said Israel should agree immediately to a state comprising Gaza and 60% of the occupied West Bank.
Negotiations would then be held on core issues, such as Jerusalem’s future, the right of return, and permanent borders.
Israel should talk to Hamas if it wins elections set for 2010, he said.
The former army chief-of-staff, a well-known hawk, announced his plan only days after Palestinian Authority President Mahmoud Abbas said he would not seek a second term, citing the impasse in efforts to resume negotiations with Israel.
At a rally in Bethlehem Sunday, Mr Abbas condemned Israel’s refusal to halt the construction of settlements in the West Bank.
"Israel says it rejects preconditions for restarting negotiations, but in fact the Israelis reject peace," he said. "They don’t want to stop settlements, and they don’t want a two-state solution."
‘No alternative’
Mr Mofaz had earlier presented his peace plan at a news conference in Jerusalem, saying it was needed "because the relative calm is dangerous, and at its end hides a violent and bloody conflict".
"My suggestion is the key for continuing negotiations and achieving peace between Israel and the Palestinians"
Shaul Mofaz
It proposes that Israel should agree to the establishment within a year of a Palestinian state with temporary borders on 60% of occupied West Bank land – mainly areas that are already under Palestinian control. Jewish settlers living outside major settlement blocs would be forced to leave and given compensation.
The next stage, according to the plan, would be negotiations on the future of Jerusalem, the right of return of Palestinian refugees, and permanent borders.
The final Palestinian state would not be formed on less that 92% of the territory that was under Egyptian and Jordanian control before 1967, it proposes. Territorial exchanges would be offered.
Mr Mofaz also said he would agree to talk to Hamas, the Islamist group which controls Gaza, if it won the Palestinian parliamentary elections scheduled for 24 January and wanted to begin negotiations.
"At that moment, it would effectively…
OBSTACLES TO PEACE
Settlements are built on land occupied by Israel in the 1967 war
History of negotiations
Jerusalem
Water
Refugees
Borders and settlements
Palestinian man stands near the settlement of Maale Adumim (4 November 2009)
Israel and Western powers have in the past demanded that Hamas must agree to recognise the Jewish state, renounce violence, and accept interim peace deals – terms which Hamas has refused to accept.
Mr Mofaz’s plan was immediately criticised by both Israelis and Palestinians, with Hamas ruling out negotiations with the "Zionist enemy".
But the former defence minister and deputy prime minister told the BBC on Monday that it had been well received outside the region.
"There is no other plan, and the question is: To what direction is there to move" he asked. "Accepting the vision of the two-state solution, we have to implement. My suggestion is the key for continuing negotiations and achieving peace between Israel and the Palestinians."
Mr Mofaz said Palestinian negotiators were not against the plan in private, but simply wary of discussing it before next year’s elections.
"In Israel, more and more people understand that time is not in favour of the state of Israel. Iran is on its way to obtaining nuclear capabilities;
"Israel’s legitimacy, in the eyes of the international community, is fading. There is a growing impatience with the occupation and the collection of settlements being built by the Israeli government."
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