RAMALLAH, West Bank - Palestinian officials yesterday sought U.S. and European help to salvage foundering peacemaking after tough terms were laid out by Israeli Prime Minister Benjamin Netanyahu, but they stopped short of refusing to resume negotiations.

Palestinian disappointment was echoed in Arab capitals, where leaders accused the Israeli leader of creating new obstacles for the peace process.

Laying out his Mideast policy Sunday, Netanyahu bent to U.S. pressure and softened decades of opposition to Palestinian statehood and sought renewed peace talks.

However, he removed from the negotiating agenda the fate of Palestinian refugees displaced by Israel's 1948 creation and said Israel would retain sovereignty over all of Jerusalem - two issues previous Israeli governments had agreed to negotiate.

He also said he would continue construction in Jewish settlements on land claimed by the Palestinians, despite U.S. demands for a freeze.

Palestinian Authority President Mahmoud Abbas has said he would not resume talks unless Israel honored previous pledges to halt construction.

Palestinian negotiator Saeb Erekat said Netanyahu's speech was so riddled with conditions that he "left nothing for negotiations."

But Erekat said the Palestinians did not want to be cast in the role of rejectionists and did not rule out the resumption of talks, which broke off late last year.

Erekat said he contacted American, European, and Russian mediators after the speech and urged them to hold the Israelis - and the Palestinians - to their obligations under previous peace plans. Israel is required to halt settlements, while Palestinians must rein in extremists.

Netanyahu's move came after months of pressure from Washington to endorse Palestinian statehood, as successive Israeli governments before his have done.

"There are new international circumstances that demanded I make a decision," Netanyahu told a party meeting yesterday. "This is the policy I chose."

In Washington, President Obama, commenting after an Oval Office meeting with Italian Prime Minister Silvio Berlusconi, said Netanyahu's endorsement of Palestinian independence showed the "possibility we can restart serious talks."

At the same time, Netanyahu's nationalist tone, tough conditions, and vague language on peacemaking appeared to avert a crisis in his hawkish coalition, where there was strong opposition to the U.S. pressure.

Foreign Minister Avigdor Lieberman, the most powerful hard-liner in Netanyahu's government, said the prime minister's speech outlined "the balance between our aspirations for peace and the aspiration for security."

Former President Bill Clinton said Netanyahu yielded just enough to not "completely alienate the United States initiative."

"It's just the beginning, and it's a drama that will have a few more acts," he told reporters at the United Nations.

Netanyahu called on Arab leaders to meet with him "any time, any place."

He pointedly avoided mentioning an Arab peace initiative that offers to trade normalized ties with the entire Arab world for a complete Israeli withdrawal from lands captured in 1967, a demand Israel rejects.

He demanded Palestinians recognize Israel's right to exist as a Jewish state - another way of saying Palestinian refugees must give up their hopes of returning to lost homes inside Israel.

Egyptian President Hosni Mubarak, a key mediator between Israel and the Palestinians, said that demand "will further complicate the situation and scuttle any chance of peace," according to the state news agency MENA.