In May 1996, permanent status negotiations between Israel and the Palestinian leadership officially began. I represented Israel and my Palestinian counterpart was Mahmoud Abbas. The discussion of permanent status issues lasted only two hours.

Instead, we opted to commence our negotiations by talking about the desired outcome of Israel's and the future Palestinian state's relations. We intended to give this focus several months' time and to postpone resolution of the final status issues to the last stage.

It seemed to me then, as it does now, that negotiations tend to be unnecessarily constrained by efforts to resolve the past, rather than channeling mutual energies toward the future. The lesson for our upcoming negotiations is that the future of Israeli-Palestinian relations must be tackled with the same vigor and vision as the resolution of permanent status issues.

On that basis, I propose a four-phase negotiation process:

Phase One: Normalization of relations -

From the outset, negotiators must share a long-term vision for future Israeli-Palestinian relations that entails close diplomatic, consular and cultural ties. The quality of such relations should be predicated on normalization and cooperation, exceeding Israel's present experience with Egypt and Jordan, and which sets the stage for potential normative relations with other Arab nations.

To that end, a partnership should embody strong economic cooperation, joint ventures on industrial zones, a free trade area with the US and Europe, and a mutual approach to shared water and regional resources.

A broad program of people-to-people activities financed by the international community should be cultivated to create a comprehensive culture of peaceful coexistence among all levels of society. That will ultimately facilitate more formal peacemaking methods.

From youth programs to inter-city projects, professional cooperation to the broad involvement of both civic societies, a growing culture of peace is conducive to effective negotiations.

Phase Two: Security arrangements -

Israel will have far less difficulty agreeing to concessions if its leadership trusts that security and anti-terrorist measures will be satisfied, including the full implementation of the first phase of the Quartet's road map - dismantling the terrorist infrastructure beginning with the West Bank.

Regarding the Gaza Strip, it is not inconceivable that progress in the political process will seriously weaken Hamas and its terrorist capacity, whose dismantlement is a precondition to the creation of a Palestinian state.

Security clauses should include detailed arrangements that address the security concerns of both sides - they may also encompass a regional anti-terror agreement along the lines of the 1996 Sharm-e-Sheikh anti-terror declaration.

In this context, comprehensive security measures and shared intelligence can be renewed in good faith.

Phase Three: Democracy - The Palestinian state and its institutions -

Of crucial significance to Israel is the emergence of a democratic Palestinian state with modern institutions and a transparent and accountable economy - a first Arab democracy.

This would also facilitate cooperation between Palestinian ministers and their Israeli counterparts, particularly in the areas of finance, education, health, agriculture and water resources. In such negotiations the Quartet's representative, Tony Blair, could also be involved as an additional external neutral influence.

Phase Four: Borders, refugees & settlements -

Negotiations of the thornier permanent status issues should commence early on through secret back-channel discussions so that more creative and comprehensive solutions can be explored and fleshed out.

These talks must filter up to the leadership level during the final phase of negotiations (approximately September 2008).

I SUSPECT most of us can already predict the nature of any permanent status agreement:

Permanent borders on the basis of 1967 armistice lines, with modifications that include 1:1 land swaps that enable Israel to create settlement blocks in the West Bank.

On the question of Jerusalem, Arab and Jewish neighborhoods would ultimately be governed by the respective Palestinian and Israeli entities. Such an arrangement would secure unprecedented international recognition of Israeli sovereignty over Jerusalem.

As for the holy sites, their sovereignty should be determined by religion - the Western Wall and synagogues to Israel; the mosques and churches to Palestine. Of course, the Temple Mount itself would have a special cooperative status in terms of excavations and/or construction.

There is no reason why other more creative solutions cannot be found for this unique city; one such example could be a United Nations declaration of Jerusalem as the world capital for peace. Conceivably, the UN could transfer a substantial number of its institutions, such as UNESCO or the headquarters for peacekeeping forces to Jerusalem, as both a symbolic and practical measure.

On the refugee issue, the Palestinians must bite the bullet. Not even the most moderate of Israelis (including myself) could agree to the influx of hundreds of thousands of Palestinians into sovereign Israel. Just as Israelis will not ultimately have a right to return to Hebron, notwithstanding their close ancestral and historic ties, the Palestinians cannot expect a right to return to Safed at the conclusion of any negotiated peace deal.

Accordingly, a comprehensive and just settlement of the Palestinian refugee issue must for the most part involve the repatriation of Palestinians to their own homeland in a future Palestinian state.

In addition, certain 1948 Palestinian refugees may be financially compensated by an international community fund, to which Israel would contribute. Resettlement of refugees to other countries - including Israel - is also an option, but any such migration will necessarily be governed by domestic legislation that contains a right to veto the entry of certain Palestinians.

Concurrent with these negotiations, a trilateral committee involving the US, Israel and the Palestinians must be established in order to monitor the implementation of the road map by both sides and the progress of the permanent status negotiations as envisaged by the recent Annapolis conference.

Ultimately, the role of the international community is instrumental, particularly when it comes to affording sizable economic and financial aid to the Palestinian economy. As the peace process gathers momentum, one can picture an emboldened Abu Mazen and a weaker Hamas, which is in both the Israeli and American strategic interests.

Permanent status is an imperative for 2008. Failure to meet that goal would favor extremism on both sides, while success is a genuine possibility if negotiations are entered into in good faith, and on the right footing.