Washington ? President Bush urged the Palestinians on Monday to replace Yasser Arafat with leaders “not compromised by terror” and adopt democratic reforms that could produce an independent state within three years.

“Peace requires a new and different Palestinian leadership so that a Palestinian state can be born,” Bush said at the White House.

In his speech, Bush said “reform must be more than cosmetic changes or a veiled attempt to preserve the status quo” if the Palestinians are to fulfill their aspirations for a state alongside Israel.

Elections should take place by the end of the year for a legislature with normal authority and there also must be a constitution, Bush said as he set strict conditions for a Palestinian state.

“When the Palestinian people have new leaders, new institutions and new security arrangements with their neighbors, the United States of America will support the creation of a Palestinian state, whose borders and certain aspects of its sovereignty will be provisional until resolved as part of a final settlement in the Middle East,” Bush said.

As for the Israelis, he said they should withdraw to positions they had on the West Bank two years ago and stop building homes for Jews on the West Bank and in Gaza. Ultimately, he said, Israel should agree to pull all the way back to the lines it held before the 1967 Mideast war.

Speaking against the backdrop of persistent terror attacks on Israel, Bush said Palestinian authorities were encouraging terrorism, not opposing it. “This is unacceptable. And the United States will not support the establishment of a Palestinian state until its leaders engage in a sustained fight against the terrorists and dismantle their infrastructure,” Bush said.

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Both Arafat and Israeli Prime Minister Ariel Sharon welcomed the president’s remarks, finding favorable elements.

Arafat said the speech represented “a serious effort to push the peace process forward,” while Sharon’s office said “genuine reforms and a new leadership” could clear the way to a diplomatic settlement.

Senior administration officials said they envision the Palestinians being able to reach provisional statehood within 18 months and full permanent statehood in as soon as three years.

“With a determined effort, this state could rise rapidly as it comes to terms with its neighbors on practical issues such as security,” Bush said.

Israeli Communications Minister Reuven Rivlin, a close ally of Sharon, interpreted Bush’s formula as calling for the Palestinians to make the first moves. Rejecting a provisional state, Rivlin said Bush’s proposal represented a “vision of bringing the Palestinian people to democracy and reform, and then to negotiate.”

A senior Palestinian official said only Palestinians can choose their leadership and already have in Arafat. “President Bush must respect the choice of the Palestinian people,” said Saeb Erekat, an Arafat aide.

Though his meaning was plain, Bush never spoke Arafat’s name.

“I call on the Palestinian people to elect new leaders not compromised by terror,” Bush said. “Today, Palestinian authorities are encouraging, not opposing terrorism. This is unacceptable.”

Too much fear

Israel also has a large stake in the success of a democratic Palestine, he said. “A stable, peaceful Palestinian state is necessary to achieve the security that Israel longs for.”

Touching delicately on the thorniest issues, the president said Jerusalem’s future and the plight of refugees must be addressed. But he offered no prescription.

“You have lived too long with fear and funerals,” he said.

Addressing the Palestinian people, Bush said he understood how they could feel like pawns in the Middle East conflict. “You deserve democracy and the rule of law,” he said. “You deserve a life for your children and an end to occupation.”

The president made his remarks in an afternoon speech in the Rose Garden, where he had announced in April that his administration would try to mediate the Israeli-Palestinian crisis. Bush leaves today for a meeting in Canada with leaders of the world’s other major industrialized democracies.

Two administration officials said that the secrecy surrounding Bush’s address was driven in part by a fear that announcing the address could trigger a suicide bombing.

Secretary of State Colin Powell, Secretary of Defense Donald Rumsfeld and Condoleezza Rice, the president’s national security adviser, stood alongside the president in stifling early summer heat. Bush and his advisers staked out a shady area.

Bush makes pledges

Terms of a provisional state and its international functions were left for negotiations between a reformed Palestinian leadership and Israel.

Bush said the United States, European Union, World Bank and International Monetary Fund stand ready to help oversee reforms in Palestinian finances.

“And the United States, along with our partners in the developed world, will increase our humanitarian assistance to relieve Palestinian suffering,” he pledged.

Powell already was in consultation with Arab and Palestinian officials as the Bush plan was developed and is likely to return to the region for direct talks, a senior administration official said.

Bush will discuss his initiative with leaders of industrialized democracies at a G-8 meeting this week. Meanwhile, with intense conflict in the Middle East, the idea of a peace conference is being put on hold, another senior official said on condition of anonymity.

In the meantime, the administration renewed its support for Israel’s self-defense, even as Israeli tanks circled Arafat’s badly damaged headquarters in Ramallah, on the West Bank, and Israel went on the offensive against Hamas militants in Gaza.

“Israel has a right to defend itself,” State Department spokesman Richard Boucher said. He also repeated the standard admonition that “everybody has to be aware of the consequences of their actions.”

On Capitol Hill, Senate Majority leader Trent Lott of Mississippi said Bush had sent a “strong message to the Palestinians that the way to peace is not paved with acts of terror.”

Senate Majority Leader Tom Daschle of South Dakota called Bush’s proposal “a beginning of a long and difficult process, not the end.”