The Palestinian Authority intends to bypass failing peace talks and establish its own de facto state within two years, Salam Fayyad, the Palestinian Prime Minister, said.

Speaking on the eve of talks in London today between Binyamin Netanyahu and Gordon Brown, his Israeli and British counterparts, Mr Fayyad said that the idea was to “end the occupation, despite the occupation”. He told The Times in an interview: “After 16 years [of failed peace talks] why not change the discourse?

“We have decided to be proactive, to expedite the end of the occupation by working very hard to build positive facts on the ground, consistent with having our state emerge as a fact that cannot be ignored. This is our agenda, and we want to pursue it doggedly.”

He said that if a functioning de facto state existed — with or without Israeli co-operation — including competent security forces, functioning public services and a thriving economy, it would force Israel to put its cards on the table as to whether it was serious about ending the 42-year occupation of the West Bank. He hoped that this goal could be achieved by mid-2011.

“It is empowering to even think that way,” said an animated Mr Fayyad, a respected economist. He has spent the past two years — since the Islamist group Hamas took over the Gaza Strip by force — wooing investors to the West Bank and building up professional security forces, trained under British and American supervision.

He said that the days of mutual recriminations were over and that both sides must commit to the 2003 “road map” whereby Israel would implement a comprehensive settlement freeze and the Palestinians curb the activities of militant groups.

“What is required is greater clarity and greater accountability,” he said, noting that the vastly improved Palestinian security forces showed his Palestinian Authority was holding up its end of the bargain. He said that it was time for the Israelis to do the same and rejected Mr Netanyahu’s attempts to secure a compromise on allowing settlement construction that is already under way to be continued.

Israel wants work to be completed on about 2,500 housing units in the West Bank, arguing that the “natural growth” of the settler population — about 300,000 people — demanded it.

Mr Fayyad said that it was vital for all such building to stop, adding that the international community considered all settlement of civilians on land occupied during war, such as the West Bank, to be illegal.

Israel was attempting to divert attention from the central issue of Palestinian statehood and mire the debate in details. “All these issues were discussed before and they turned out to be loopholes to continue settlement activity,” he said. “All that is expected is for Israel to refrain from the violation of international law.”

He said that time was running out. “The horizon continues to recede,” he added, emphasising that even as talks been going on in the past 16 years, more Palestinian land was being taken over. “It’s not that we’re at a standstill. It’s not that settlement activity is frozen pending a resolution. Settlement activity continues, wall construction continues, confiscation of Palestinian land continues, home demolitions in Jerusalem continue.”

Mr Netanyahu arrived in London last night for talks with Mr Brown and then with George Mitchell, President Obama’s special envoy to the region, tomorrow.

Israeli media said that Mr Netanyahu was expected to tell the US envoy that he would not accept limitations on Israel’s sovereignty over Jerusalem and would not restrict settlers living in the West Bank significantly.

Israel’s commitment to a settlement freeze was thrown further into question this week after the Interior Minister and Deputy Prime Minister said that some settlements that had either been evacuated or were slated for demolition should be legalised.

“These are government ministers, they are not commentators or observers. I cannot but take that seriously” said Mr Fayyad.