Late last month, Tzipi Livni was back in the news. Despite finishing first early last year in parliamentary elections, Ms. Livni declined to join a right-wing dominated coalition led by Benjamin Netanyahu and instead went into the opposition. Then, just before Christmas, Mr. Netanyahu courted her, inviting her into his government. She ultimately refused. The Wall Street Journal's Joshua Mitnick and Charles Levinson caught up with Ms. Livni days before Mr. Netanyahu's offer. Below is an edited transcript of the interview.

Q: Your parents were part of Herut, the forerunner of today's Likud party. As a champion of the two-state solution, is it difficult to break with that past?

A: This is a misperception. I believe that what I'm doing is implementing the values that my parents taught me are essential for the state. It was never only about the land of Israel, but it was also about our values. The idea was not only to create a state. The vision, then and now, is being a Jewish and democratic state, or being a homeland for the Jewish people. Since the realities are such that, in order to keep Israel as a homeland for the Jewish people, we need to give up part of the land, it doesn't mean that I don't believe in the rights of the Jewish people to the entire land. I still do. I believe the Jewish people have the right to the entire land -- judicial, biblical historical, moral, whatever.

But my vision, as I believe the vision of my parents was, is to keep the state of Israel as a homeland for the Jewish people. And since they also believed in the values of democracy, there's a need for a Jewish majority. In order to have peace, we need to give up part of the land. The whole vision is to keep Israel a Jewish and democratic state living in peace and security in the land of Israel. And the only way to keep all these together, is to give up part of the land. Because without giving up part of the land, it means we give up the idea, or the essence, of Israel as a homeland for the Jewish people. And this is something we cannot afford.

In terms of left and right, I know there are those saying, "Okay, you came from a right-wing party, and now you represent the left wing.'' And this is not the way I see it. Even though I fully believe in the idea of two nation states, which was basically the slogan of the left wing in Israel for many years, I still come from what is basically the right wing, and this is the need to keep Israel as the homeland for a Jewish people.

Q: Do you remember a pivotal moment when you first realized you had to support a two-state solution?

A: Ever since I entered politics this was my best understanding [of the solution to the conflict.] But I do remember when I decided to get into politics. It was in 1995, a few weeks before [former Israeli Prime Minister Yitzhak] Rabin was murdered. And society was divided between two different camps. One was called camp of the land of Israel and the other one was the camp of peace. And I heard politicians, and also some of my friends, talking about the need to fight against the Oslo agreement and Rabin -- who represented this need to divide the land -- because, "we love this land,'' and because "this is heritage of our forefathers.''

I had the same connection as they did to the land. But I understood we needed to divide the land in 1995. But on the other hand, I heard other friends of mine, that put on their nice T-shirts with a glass of wine in their hands, waiting for the "New Middle East'' to fall on their heads "because we are going to live happily ever after.'' And I thought, "I'm in between these two camps.'' On one hand I have the same feelings toward the land … and on the other hand I wanted to live in peace.

But I was more realistic in my understanding that the Oslo agreement, tactically, was not going to bring peace the next day. I don't believe in something that is vague…. [it said,] "take some [territory], but we will speak about Jerusalem, refugees and borders afterwards.''

Q: Isn't it a problem for you that, even though Israelis support a two-state peace agreement, they don't believe it's possible.

A: I think that a deal is possible. I believe it is. This is the reason for me to be in politics and to be in the opposition, because of the need to keep this alternative.

Q: What would you do, or what needs to be done?

A: To re-launch the negotiations from the point that I stopped with Abu Ala (Palestinian peace negotiator Ahmed Qureia) and Abu Mazen (Palestinian president Mahmoud Abbas) a year ago. … I think it was November of '08. We were in Sharm el Sheikh. Abu Mazen and I presented to the Quartet and the entire international community, and the Arab world the basic understandings in terms of the negotiations -- not the substance, but what we agreed on regarding how to negotiate.

The Palestinians said they trusted the process. I said the same. We decided that it would be a complete and concrete agreement. Not a partial one. Not an interim one. And that we are going to give an answer to all the outstanding issues. That nothing is agreed until everything is agreed. That it is discrete. And after reaching an agreement, it was agreed that implementation is going to be subject to the Road Map and to other conditions that are going to be part of a final status peace treaty.

We said at Annapolis that the right thing to do is to negotiate with those that -- I hope -- we can reach an agreement with that will give all the answers and issues, so we can have a complete border and not just a formula that relates to '67 border. … But to define the border exactly.

The idea is as follows: We start now the final status negotiations, OK? And we change realities on the ground in the West Bank. We do this simultaneously. And then at some point in time we reach an agreement. But now it's only a piece of paper. Then we see what the situation on the ground is, and whether the situation [meets] the conditions that are needed in order to create a state -- a state which is not a terror state, which is not a failed state, and which is not an extremist Islamic state. [Rather], subject to the conditions that we can agree upon …

So if [the situation on the ground] is not ready yet, we have this shelf agreement. But we have a period of time in which we are continuing in changing the realities on the ground. During this period of time there are things we can do. Since we know where the borders are, we can remove settlements and put them as part of Israel or the blocs of settlements that are going to be part of Israel. But it is clear what the borders are.

This is a period of time where we can work, because we can take [down] settlements. We can keep our forces [there] until the changes make it possible to create the state.

Now, you can ask me, "What about Hamas?''

It is clear that Hamas is not partner for peace talks, because Hamas does not represent the national aspirations of the Palestinians. Hamas represents this extremist ideology. It is clear that they are not going to accept the "end of conflict.'' And I'm sure they are going to say whoever signs an agreement with Israel are traitors. OK? But assuming we have this agreement -- a "shelf agreement'' as it is called. I know that in order to sign the agreement the Palestinians are going to need the support of the entire Arab world, and this will need to get the support of the entire world, and the Security Council. And then Hamas is going to be isolated. And they now will have to choose whether they want to be isolated with Iran, Hezbollah, and maybe Syria -- I don't know.

But since everyone is going to support it, I think its going to make it more difficult for Hamas to fight against it. And at the end of the day, for the Palestinians -- when there is an agreement -- because there is lack of trust on the Palestinian side of the agreement. But it is clear. They have borders, they will have a state, and all the conditions to create the state will be there. It's not a just a vague idea of re-launching the negotiations. And then they need to choose between Hamas and a state.

By the way, I'm not optimistic. I want to say that this is a realistic approach. Because I feel that this is a tough neighborhood. So, it's not a vague agreement or a vague vision.

Q: Do you foresee a third-party security force in the Palestinian territories?

A: Part of the discussions was our security needs. And I believe that the security needs of Israel are not only our interest, because I don't think that the world wants a terror state here. It's a mutual interest, it's an international interest to end the conflict. And the only way to end the conflict is: one, to understand that the implementation of the idea of two nation states means that the creation of Palestinian state is the end of conflict. And it [fulfills] the national aspirations of the entire Palestinian people, including the refugees. Because we don't what to have a Palestinian state [while] Israel has ongoing demands of Palestinian refugees to come to Israel. Since everybody wants to end the conflict, the idea that the creation of the Palestinian state is answer to their national aspiration is something that the world can support.

And when it comes to Israel's security needs, we discussed it. They raised this idea of international forces. We had our own internal debate on this. It was not agreed yet for international forces.

But what was discussed, and I feel that I don't want to betray the trust that we built during negotiations, but basically we built an understanding. … At the end of the day, the idea was to reach an understanding on a list of arms which are needed in order to confront internal terrorism, and which cannot be accepted by Israel because it can threaten Israel, or at least can be an ongoing conflict afterward. And this is something that doesn't affect the sovereignty or independence of a future Palestinian state, just like other states: like Germany has some limitations on its arms. Egypt accepted limitations in Sinai in the agreement with Israel that was signed by (Israeli Prime Minister Menachem) Begin and (Egyptian President Anwar) Sadat. ...

Q: Was it a mistake of the Obama administration to focus on a settlement freeze and are the Palestinians being too stubborn by insisting on a full freeze as a condition for talks?

A: The Palestinians never loved settlement activity. This is the understatement of the year. They never accepted when Israel built in blocs. Also the U.S. never accepted settlement activity. But when we negotiated there was trust and understanding that we were going to end this conflict in the shortest period of time possible. We were not suspected that we wanted to grab more land, or to change realities on the ground in order to have a different border in the future. And I tell it also to Palestinians in the past, that the way I see settlements, is in terms of a final status agreement. Since I made my choice. I believe that my role, or the most important role of any Israeli is to define the borders and to have a legitimate border. Regardless of what you think of settlement activity in the past – whether you think its Jews building in their ancient homeland or it is against international law. It's not important. Because we have what we call ``blocs of settlements,'' and most of them are very close to the Green Line. It takes only a few percentages [of the territory]. Whether we like it or not, we have to give an answer to these realities in any peace agreement. The way I see it this is the thing that is the most important thing for any Israeli leader. It's not about building now, but to keep the blocs of settlements as part of Israel in the future. There's no need for me to expand or build more, but to give an answer for this. And since we built this trust, and they knew that this is what we want. … It's not like you asked me to say '67 and said that I want a reduction. I don't want to make a better deal. I need to give an answer for the realities on the ground, so we need to define together where are the places in which most of the Israelis live. I know that, you don't like it, but without it, the ability to perform, or implement this agreement is going to be zero. So since we had this trust during the negotiations, and they understood that we sometimes we build, and it was not saying, like ``we are continuing.'' It's not ideology. Our ideology was to end the conflict, to define the borders, and to make a decision. And this is the way we acted. And I think that the situation now is different.

Q: Has Netanyahu marginalized you by accepting the two-state solution? How do you explain public opinion polls shows support shifting to the right?

A: Basically Kadima gets in all the polls in the newspaper the same 28 or 29 seats in Parliament. So this is one thing. We keep our support. I was glad to hear Netanyahu say "two states'' because of what I just told you. Since I understand the nature of the decision, and its going to be difficult, I want what Israelis call the "Right [political] camp'' to change even the words. Because people that never said these words and thought it was against their ideology, for the first time, they are now hearing it from the right-wing leader in Israel. So this is nice. It's good because any decision that any leader is going to make in order to end the conflict is going to is going to be difficult as hell for everybody. So I want people to understand that there is no other option. And for the first time they understand there is no other option. Netanyahu was speaking about security peace and economic peace, and for the first time he said the words.

And I know the perception is that he said so because of the American pressure. So what? I mean I believe that this represents the Israeli interests. But if the people think that there is no other option because of the American pressure, so let it be. This is good news for peace, not for me personally.

And I believe that the only reason for him to say these words is because I was not part of this government. Because for the first time, this group of right-wing parties … are alone in the government and need to give answers to the best friend of Israel and its ally, which every Israeli citizens understands that the relationship between Israel and the U.S. is crucial for the future of Israel. It's not something you can give up. For the first time, I was not the excuse, or I was not the fig leaf of the government, and Netanyahu needed to say it himself.

Being the alternative there and not inside, not part of, not representing something with the prime minister saying, "Well she represents her own view, and I think that we need to do something else…'' For the first time they needed to say something which was obvious to me. And the only reason for them to do so is because they needed to give some answer. I'm glad that this happened. But it's not enough.

Q: Will that continue to happen if you stay in the opposition, or would it be better to join Netanyahu?

A: I'll make this short. Since I am familiar with the decisions needed, and since I entered politics to end this conflict, this is my basic drive to be in politics… If any Israeli prime minister, including Netanyahu, is willing to make the decisions to end this conflict, I'm ready to be there to hold his hand and to help him in order to it. I cannot be part of a never-ending process without me understanding what the willingness is to make decisions. This is my test. It's not about words, it's about [actions]. The moment I know I can change, I can make a difference, that I can help make real decisions, it's not important what the position is, I will be there. If not, what's the use? It could lead Israelis to lose hope. If everybody is there, and nothing happens, then what? There's no chance for peace.