In a rare speech to an Israeli audience, Palestinian Authority Prime Minister Salam Fayyad said Tuesday that Israel must show the Palestinians that it is beginning to roll back the occupation, and that the way to do that is primarily by stopping both settlement construction and IDF incursions into Palestinian areas.

Fayyad, addressing the 10th Herzliya Conference immediately after Defense Minister Ehud Barak, said in a speech delivered in a conciliatory tone that the problem with settlement construction was that not only was it eating up territory where the Palestinians hoped to build a state, but that the inability to stop the construction raised doubts among the Palestinians as to whether any Israeli government could implement a future agreement.

“The Palestinian state is supposed to emerge precisely where settlements are expanding,” he said. “The political question I have is how confident can we be that once relaunched, the political process is going to be able to deliver that which needs to be delivered on the permanent status issues, on the key question of ending the occupation,” Fayyad said.

He said that the PA is sensitive to Israel’s security needs, and that “given that security conditions have so vastly improved,” the time for IDF incursions into areas under Palestinian control has come to an end.

“In fact, what would create all of this in a context of an occupation to be ended, is for us Palestinians to have formal security presence in other population areas outside of Area A, because nothing – as anyone will tell you – defines a state more than where its own security service[s], not the occupation security services, are,” he said.

This move, Fayyad added as Barak looked on, would give Palestinians confidence that Israel really intended to end the occupation.

The PA prime minister, speaking in English and warmly received, reiterated the Palestinians’ claim to east Jerusalem, saying this was no less land occupied by Israel in 1967 than the West Bank and the Gaza Strip.

Regarding Gaza, Fayyad said it was essential that “our country be reunified,” and that lifting the blockade of the Gaza Strip would go along way toward enabling the PA to reassert control there. He said that the PA could move faster toward building government institutions in Gaza, then it has done in the West Bank, because the area is smaller.

Fayyad outlined the steps his government was taking to build its governing capacity, saying that he hoped that by mid-2011 the institutions would be in place that would be able provide a good level of services – social, economic and security – to the Palestinians.

The hope, he admitted, was that once the world saw that the Palestinians had the ability to effectively govern themselves, the pressure would rise to bring about an end to the occupation.

Fayyad mentioned on a number of occasions the Palestinians’ recognition in 1988 of Israel’s right to live in peace and security, and said that the PA was not wavering from that commitment.

And just as the Palestinians recognized Israel’s right, so to the concept of two states must be accepted in Israel, he said.

Referring to a comment Barak made about the “roughness” of the region, Fayyad said “the roughness of this neighborhood can be reduced if not eliminated if occupation comes to an end.” He said permanent peace was not possible unless “the concept of Palestinian statehood is accepted.”

In a conciliatory statement to end his address, Fayyad said, “The Israeli people have a long history, they have pain, they have ambition, and like you, we Palestinians have our own history. Right now we are going through lots of pain and suffering. And we have one key aspiration, and that is once again to be able to live alongside you in peace, harmony and security.”

Barak, in his address, praised Fayyad for his work in developing Palestinian infrastructure, and said that the Israel faced a cruel reality.

There are 12 million people living between the Jordan River and the Mediterranean Sea, he said – 7.5 million Israelis and 4.5 million Palestinians. If there is one state in that area, he said, it will necessarily either be not Jewish or not democratic. “If that block of millions of Palestinians vote, then there will be a binational state, and if they don’t vote, then there will be an apartheid state. Neither is the Zionist dream.”

He said that “good fences make good neighbors,” and that it would take one to two years to reach an agreement with Palestinians, and another three to implement it. The most difficult decisions Prime Minister Binyamin Netanyahu and PA President Mahmoud Abbas will have to make, he said, will be not regarding the other side, but toward their own people.

Barak called on the religious Right to realize that during the two periods of Jewish commonwealths in the distant past, the borders of the land were determined based on the political realities of the time. At the same time, he called on the Left not to be naïve.

There will only be peace, Barak said, when Israel’s enemies realize that it can’t be defeated militarily, worn down by terrorism, or entrapped diplomatically.