The Palestinians had effectively established a state while peace negotiations were still ongoing, President Shimon Peres told the World Economic Forum in Davos, Switzerland on Thursday.

During a discussion on the chances for peace in the Middle East, Peres praised Palestinian President Mahmoud Abbas and his prime minister, Salam Fayyad for their state-building efforts, including the establishment of an independent military force.

State-building is possible without negotiations, the president told the panel, which included Fayyad.

Addressing Iran, Peres called on Europe to impose harsher sanctions in order to halt Tehran's nuclear program, adding that the international community must bring an end to Iran's influence in the Middle East.

He said Iran has turned Gaza into a base for rocket attacks on Israel and claimed Hezbollah, which is backed by Tehran, almost led to the destruction of Lebanon.

Peres said Iran was the only country in the world to openly call for the destruction of another country – Israel. He also called on the international community to encourage Iranians to topple President Mahmoud Ahmadinejad's regime.

According to the president, Israel has a historic duty to make peace with the Palestinians, in accordance with that he referred to as the Jewish tradition which does not allow Jews to rule over other people.

The solution, Peres said, was two states for two peoples.

Fayyad said during the discussion that state-building and negotiations were equally important. "The political process since the Oslo Accords wasn't focused enough," he said, adding that the international community should intervene in the process. "Look at us, we are struggling just to sit (at the negotiation table). It's time we recognize the process has failed," Fayyad said.

Peres disagreed, saying the process should focus on direct talks between Israel and the Palestinians. He said the Israeli-Palestinian conflict was not a global issue.

On Wednesday Israel negotiator Yitzhak Molcho and his Palestinian counterpart Saeb Erekat met in Amman, Jordan for the fifth time. Palestinian officials said the exploratory talks did not yield results.

During the meeting Erekat insisted that Israel halt all settlement construction.

The European Union High Representative for Foreign Affairs Catherine Ashton met with Prime Minister Benjamin Netanyahu and Foreign Minister Avigdor Lieberman in Jerusalem Wednesday, and on Thursday she held talks with Abbas.

Sources who are familiar with the talks said she was promoting an Israeli incentives package that would convince the Palestinians to continue negotiating.