Jerusalem ? In a speech seen as a test of Obama administration influence, Israeli Prime Minister Benjamin Netanyahu on Sunday offered conditional support for the establishment of a Palestinian state and refused to bring a halt to divisive expansion of Jewish settlements in the West Bank.

He also imposed new conditions on peace talks, demanding Palestinians explicitly recognize Israel as a Jewish state and agree not to have an army. Palestinian leaders rejected both.

“It is impossible to expect us to agree in advance to the principle of a Palestinian state without assurances that this state will be demilitarized,” Netanyahu told hundreds of supporters at Bar-Ilan University near Tel Aviv.

Quandary for Obama

The speech, Netanyahu’s first major foreign policy address since he took office 10 weeks ago, creates a quandary for President Barack Obama, who has called on the new prime minister to accept Israel’s previous commitment to freeze settlement construction in the West Bank and to embrace a two-state solution.

“You have President ‘Yes We Can’ squaring off against Prime Minister ‘No You Won’t’ and the only way this is going to be resolved is if the two are willing to give,” said Aaron David Miller, a former U.S. Middle East peace negotiator and author of “The Much Too Promised Land: America’s Elusive Search for Middle East Peace.”

The White House praised Netanyahu’s speech as an “important step forward” and offered implicit support for the prime minister’s demand that Palestinians recognize Israel as a Jewish nation.

“The president is committed to two states, a Jewish state of Israel and an independent Palestine,” White House spokesman Robert Gibbs said.

Leaders of the pro-Western Palestinian Authority have recognized Israel and the two-state solution. But Palestinian leaders have rejected recognizing Israel as a Jewish state because one-fifth of the population is Arab.

Settlements an issue

Netanyahu’s speech came 10 days after Obama, in a historic Cairo address to the Arab and Muslim world, called Israeli settlement construction an unacceptable obstacle to Middle East peace.

But Netanyahu defended the settlers as Jewish pioneers and indicated he would continue to support settlement construction in the West Bank. The issue is likely to remain center stage this week when Israeli Foreign Minister Avigdor Lieberman, an ultra-nationalist who opposes major concessions in peace talks, makes his first visit to Washington as his country’s top diplomat.

“Obama’s prestige is on the line, particularly with regard to the settlements,” said Yossi Alpher, a former official with Israel’s Mossad spy agency and co-founder of the bitterlemons.org Web site.

While Netanyahu called for renewed peace talks without preconditions, he outlined a series of demands. Along with his call for Palestinians to accept a demilitarized state and explicitly recognize Israel as a Jewish nation, Netanyahu said there would be no discussion of ceding control of any parts of Jerusalem to establish a capital of a future Palestinian state or of allowing Palestinian refugees to return to ancestral homes they fled in 1948.