Israeli and Palestinian leaders are expected to start to sketch the contours of a Palestinian state next week. Condoleezza Rice, the US Secretary of State, ended a 24-hour shuttle between Jerusalem and Ramallah yesterday, convinced that the two sides were ready to discuss fundamental issues in advance of President Bush's Middle East peace conference, now tentatively planned to take place in Washington in November.

Mahmoud Abbas, the Palestinian President, said that, after meeting Ms Rice, he was ready to negotiate a declaration of principles as an interim step. "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," he said.

Israeli spokesmen were reluctant to commit themselves on the record, but Israeli diplomatic correspondents reported that Ehud Olmert, the Prime Minister, had proposed negotiating "agreed principles" to Ms Rice over dinner on Wednesday.

Neither national leader is strong enough now to sign a final agreement. Mr Abbas's Fatah group has lost Gaza to Hamas and is still consolidating its hold on the West Bank. Mr Olmert is beset by scandals and investigations.

A declaration of principles is designed to give the Palestinians the "political horizon" they have demanded. The negotiators will not attempt to solve the core issues of final borders, Jerusalem and refugees at this stage.

It is also meant to offer an incentive to Saudi Arabia and other "moderate" Arab states to attend the autumn conference. Prince Saud al-Faisal, the Saudi Foreign Minister, said after talks with Ms Rice in Riyadh on Wednesday: "When we get an invitation to attend, we will study it and we will be keen to attend." He insisted, however, that the conference had to "deal with the heart of the peace process".

Mr Olmert's office responded with a statement saying he "shares the same approach, that the international meeting will be serious and meaningful, and he welcomes the participation of leaders of Arab countries". Tzipi Livni, the Israeli Foreign Minister, assured the US that "Israel is not going to miss this opportunity".

Ms Rice reinforced the message in Ramallah: "The President of the United States has no desire to call people together for a photo op. This is to call people together so that we can really advance Palestinian statehood."

She has made no attempt to contact Hamas. To strengthen Mr Abbas in his power struggle with the Islamic movement, she signed an agreement granting his government $80m (£40m) to enhance his security forces.

Sami Abu Zuhri, a Hamas spokesman, denounced the deal. "Rice is not coming to establish a Palestinian state but to build death squads that will work against resistance groups, including Hamas," he said.

In Gaza, Hamas's Executive Force shot dead three Islamic Jihad and Fatah gunmen yesterday and wounded seven after they refused to hand over their weapons. The force commander Islam Shahwan said: "Nobody is above the law - families or factions."

UN monitors reported yesterday that the economic situation in Gaza continues to deteriorate. "The total accumulative and direct losses since the closure of the Gaza crossings in mid-June are now reaching about $23m, with an average daily loss of $500,000."

Hamas officials recently banned the distribution in Gaza of three West Bank newspapers that support Mr Abbas's government. They also took a critical television talk show, recorded in Gaza, off Palestinian screens.