World powers should isolate the Israeli prime minister Benjamin Netanyahu after he unveiled tough terms for a Middle East peace accord, an aide to the Palestinian president Mahmoud Abbas said today.

In a major policy speech yesterday, Mr Netanyahu responded to weeks of pressure from Washington by finally giving his endorsement, with conditions, to the establishment of a demilitarised Palestinian state.

Palestinians were dismayed by his demand they first recognise Israel as a Jewish state and his failure to heed a call they and the US President Barack Obama have voiced to halt Jewish settlement construction in the occupied West Bank.

“The international community should confront this policy, through which Netanyahu wants to kill off any chance for peace,” Mr Abbas’ adviser, Yasser Abed Rabbo, told reporters.

“They must isolate and confront this policy which Mr Netanyahu is adopting and exert pressure on him so that he adheres to international legitimacy and the road map,” he said, referring to a US-sponsored 2003 peace plan.

Mr Netanyahu pledged to keep all of Jerusalem as Israel’s capital, defying Palestinians’ claim on the city, and hedged on whether Israel would ever remove West Bank settlements.

He ruled out the admission of Palestinian refugees to Israel proper and said Mr Abbas must impose his authority over the breakaway Hamas Islamists ruling the Gaza Strip.

The address, in which Mr Netanyahu urged the Palestinians to resume talks with Israel immediately, was welcomed by the White House as “an important step forward” for implementing Mr Obama’s vision. The European Union also praised Mr Netanyahu’s speech.

Palestinian negotiator Saeb Erekat said mediators should challenge Mr Netanyahu on whether he was prepared to tackle territorial issues such as borders, Jerusalem and settlements.

“Netanyahu is talking about negotiations about cantons – the canton of the state of Palestine, with a flag and an anthem, a state without borders, without sovereignty, without a capital,” Mr Erekat said.

Mr Netanyahu’s speech was greeted with circumspection across the political spectrum in Israel, which has seen almost two decades of stop-start talks about a “two-state solution”, a concept the right-wing Likud party chief had balked at endorsing.

“Welcome, Mr Prime Minister, to the 20th century. The problem is, we’re already in the 21st century,” political commentator Ben Caspit wrote in the Maariv newspaper.

Mr Netanyahu’s cabinet secretary, Zvi Hauser, described the speech as an opening move in what Israel hoped would be discussions of a peace deal involving the wider Arab world.

“Look, of course we must all distinguish between what is desirable and what is at hand. Yesterday, the prime minister delineated what is desirable,” Mr Hauser told Israel’s Army Radio.

“As of this morning, we have to deal with what is at hand, and what is at hand is not just in our court. What is at hand is mainly in the other side’s court.”