HERZLIYA, Israel, Feb 2 (Tom Perry/Reuters) - Israel must begin to roll back its occupation of the Palestinian territories to convince Palestinians it wants a peace deal that would give them statehood, the Palestinian prime minister said on Tuesday.

Addressing an audience alongside Israeli Defense Minister Ehud Barak, Salam Fayyad said rolling back should start by ending army incursions in the West Bank, where the Palestinians aim to establish their state, along with Gaza.

Unfortunately those incursions continue, Fayyad told the Herzliya Conference, which annually attracts prominent figures in the Israeli political and diplomatic establishment.

Halting the practice and handing over more security responsibilities to the Palestinians on their land would show that the Israeli occupation is being rolled back on its way to ending, Fayyad said.

After over 16 years of peace process that has yielded little, Palestinians needed to see convincing, concrete signs that new talks would lead to where they want to go.

With peace talks frozen for more than a year, Fayyad's attendance was the highest-level public encounter between a Palestinian and Israeli official since September, when Palestinian President Mahmoud Abbas met Israeli Prime Minister Benjamin Netanyahu in New York under US auspices.

That meeting failed to break the impasse between them and US efforts to broker a resumption of peace talks have yet to yield a breakthrough and a resumption of negotiations.


READY FOR STATEHOOD

Palestinian policy towards the peace process rests ultimately with Abbas, head of the Fateh party and the Palestine Liberation Organization. Fayyad's attendance of the conference had been criticised in private by some senior Fatah figures.

Fayyad echoed Abbas's opposition to any more peace talks without a full halt to Israeli settlement building in the West Bank, occupied since 1967. Without such a freeze, the Palestinians would doubt the value of more talks, he said.

He said he would build the key institutions of a Palestinian state by the middle of 2011, telling critics: Yes, it is unilateral ... because only the Palestinians can do it.

By 2001 we will have amassed a critical mass of positive change on the ground, consistent with the emergence of that Palestinian state, he said. This is not about declaring a state, it is about getting ready for one, he said.

If the peace process launched in 1993 had not still ended the occupation by then, the existence of functioning Palestinian state institutions would convince the world that the only thing standing in its way was the occupation, he said.

Acknowledging that the Palestinian Authority currently has no control over the Gaza Strip, which is ruled by the Islamist Hamas movement, Fayyad said that breach had to be healed.

He also appealed to Israel to lift its wrong and wrong-headed blockade of the enclave.

Barak, leader of the Labour Party and a former prime minister, praised what he called Fayyad's practical and concrete thinking. Important things are happening, he said, highlighting reform of the Palestinian security forces in the West Bank as an area of progress.

Israel has a clear silent majority in favour of peace, Barak said, and it does not want apartheid rule over the Palestinians. It must set borders for the land of Israel that would comprise a massive and solid Jewish majority for generations with a Palestinian state as its neighbour.

We have a supreme responsibility ... to advance in the diplomatic process. The alternatives are much worse, he said. (Additional reporting by Douglas Hamilton and Allyn Fisher-Ilan; Editing by Charles Dick)