Israeli and Palestinian leaders will enter into negotiations on the "fundamental issues" leading to the creation of a future Palestinian state at a Middle East peace conference to be held this autumn, Condoleezza Rice disclosed today.

The US Secretary of State told a West Bank press conference that Ehud Olmert, the Israeli Prime Minister, whom she met yesterday, had said he was ready to work with the Palestinians to discuss the contours of a future state.

Mahmoud Abbas, the Palestinian President, told the press conference that he too was ready to work with Israel to draw up a "declaration of principles" between the two sides during the conference.

The idea for talks on the contours of a future state would see the two sides attempt to make progress on issues such as West Bank borders and economic relations, without tackling the most contentious issues, such as the future of the disputed city of Jerusalem and the fate of the descendants of Palestinian refugees scattered throughout the Middle East, which would be discussed later.

The stage for the talks looks certain to be a Middle East peace conference proposed by the Bush Administration for this autumn. Yesterday, in another apparent coup for the US Secretary of State, Saudi Arabia - which has no diplomatic relations with Israel - indicated it would be prepared to attend the talks, helping to give them crucial legitimacy within some sections of the Arab world.

Also during her press conference with Mr Abbas, Ms Rice disclosed that the US had signed an agreement granting his Palestinian Authority, which controls the West Bank, $80m (£39m) to reform its security services.

The move is designed to strengthen the forces, affiliated to Western-backed Mr Abbas's secular Fatah party, which were driven out of the Gaza Strip by the Islamic fundamentalist Hamas movement earlier in the summer. Senior Fatah figures fear that Hamas may try to stir up a similar confrontation in the West Bank.

Hamas, which exercises military rule in Gaza after its coup, has continued to refuse to recognise Israel's right to exist or renounce terrorism, and says any talks or deals which focus on Fatah and exclude them this autumn will be pointless.

Speaking alongside Mr Abbas today on the final stop of her Middle East tour, Ms Rice said to the Palestinian leader that Israel had agreed to substantive negotiations.

"The (Israeli) Prime Minister said to me that he will support new discussions with you, and that he is ready to discuss the fundamental issues that will lead to negotiations soon for the creation of a Palestinian state," she said.

Mr Abbas replied that he was ready to enter the discussions in order to "focus on implementing what was mentioned in the road map," referring to the international peace plan that envisions a Palestinian state alongside Israel.

"Then we could end in a declaration of principles," Mr Abbas said. "What is important is that we arrive at a result and that we know what that result is, what is the roof that we need to reach and what are the stages of implementation that we can agree on."

Ms Rice added that she wanted autumn's conference significantly to revive the Middle East peace process.

"The President of the United States has no desire to call people together for a photo opportunity," she said. "This is to call people together so that we can really advance Palestinian statehood."

Today's press conference brought to a close Ms Rice's whirlwind three-day trip to the Middle East, which featured the controversial announcement of a multi-billion dollar arms deal with moderate Arab states after discussions in Egypt and Saudi Arabia.

After the announcement, Saudi Arabia - one of its chief beneficiaries - announced that it would open up full diplomatic relations with the US-backed Iraqi Government for the first time, and work to fight the Iraqi insurgency against US and UK troops.