Israel is willing to discuss “fundamental issues” with the Palestinians about the creation of their future state, Condoleezza Rice, the US Secretary of State, said yesterday.

With the Palestinian leadership demanding that fresh talks focus on vital issues such as borders, the status of millions of refugees and the status of Jerusalem, Dr Rice held out new hope that talks could go beyond the modest trust-building measures that the Jewish state has so far put on the table.

Ehud Olmert, the Israeli Prime Minister, was ready to discuss key matters pertaining to a future Palestinian state, she told a joint press conference with Mahmoud Abbas, the Palestinian President, after talks in the West Bank city of Ramallah. “He 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,” Dr Rice reported.

However, she refused to be drawn on whether the issues she discussed with Mr Olmert included refugees, borders or Jerusalem. She would say only that “the word fundamental speaks for itself”, adding: “I think the desire to move towards a two-state solution seems to be there on both sides.”

Dr Rice and Salam Fayyad, the moderate West Bank Prime Minister, also signed an $80 million (£40 million) framework agreement to assist Palestinian security forces after Fatah fighters in Gaza were routed by Hamas in June.