JERUSALEM (AP) -- Prime Minister Ariel Sharon said Tuesday he would accept creation of a Palestinian state but would impose strict limitations on it, a less generous offer than the Palestinians turned down in January.
Sharon's statement came after world leaders, starting with President Bush, endorsed the Palestinian right to a state in pronouncements over the past few days.
The United States has been pressing Israel and the Palestinians to tone down their conflict, to avoid interference with coalition-building for the wider struggle against terrorism now being fought in Afghanistan.
Sharon told Likud party members near Haifa that a Palestinian state could result from negotiations, but it would have to be demilitarized.
Israel would control its borders and would retain security zones in the West Bank and Gaza Strip, he said. Israel would also keep control over all of Jerusalem, including Arab neighborhoods and a hotly disputed site holy site known as the Temple Mount to Jews and the Noble Sanctuary to Muslims, he said.
In January, the Palestinians turned down a more generous offer from then-Prime Minister Ehud Barak. Barak offered all of Gaza and more than 90 percent of the West Bank, sovereignty in Palestinian neighborhoods in Jerusalem and control over the key disputed holy site.
Meanwhile, Israeli government figures showed that building in Jewish settlements in the West Bank and Gaza is down sharply, and both settlers and peace activists said Tuesday that a year of Mideast fighting, in which settlers have been repeatedly targeted, has choked off demand.
Government figures quoted Tuesday by the Peace Now group said there were only 832 housing starts in the first half of the year, compared to nearly 4,500 in 2000, a year of peak construction despite Barak's peace efforts.
The current year's figures show "a drastic reduction," said Peace Now spokesman Didi Remez. He said the group surveyed contractors of settlement projects in April and found they reported an "almost total drop-off of demand."
In a letter to U.S. consul Ron Schlicher, Palestinian Information Minister Yasser Abed Rabbo condemned the continuation of any settlement building, saying it has "always sent a message to the Palestinian people that Israel is not really interested in ending its illegal occupation."
A complete settlement freeze is a key recommendation by the international commission led by former U.S. Sen. George Mitchell for restarting peace talks.
Sharon has been one of the biggest backers of the settlement movement, but he set up a broad coalition government together with Barak's Labor Party and has agreed to the Mitchell recommendations in principle, as have the Palestinians.
The unrest, in which 46 settlers have been killed on West Bank and Gaza roads, has caused "a very great drop in purchase of apartments and building of apartments" in the settlements, settler leader Pinhas Wallerstein told The Associated Press.
He did not give figures, but said most of the current construction is in settlements for ultra-Orthodox Jews forced out of Israeli cities by overcrowding.
Housing Ministry spokesman Moshe Eilat said that construction is down because "demand is down, and there is also a business recession." He said the government builds housing "only according to demand."
The Palestinians are demanding a state in all of the West Bank and Gaza Strip, dismantling of all Jewish settlements and the right of millions of war refugees and their descendants to return to their original homes in Israel.
Even though a two-week old truce appears to be taking hold, another Islamic militant was killed Tuesday -- the third to die in as many days.
The member of the Hamas group was killed by a blast in his Gaza home, Palestinian security officials said, apparently when a bomb he was preparing went off. Ismail Hanaya, a Hamas spokesman, blamed Israel for the blast. The Israeli military said it knew nothing about the incident.
Since fighting erupted in September, 2000, 681 people have been killed on the Palestinian side and 184 on the Israeli side.
