Binyamin Netanyahu, the Israeli prime minister, has called for a demilitarised Palestinian state, saying that would be key to peace between Israel and the Palestinians.

In his much-anticipated policy speech on Sunday, Netanyahu called for the immediate resumption of peace talks between the two sides.

"In my vision of peace, two people live in good neighbourly relations, each with their own flag ... Neither threaten the other's security," he told his audience at Bar-Ilan University, outside Tel Aviv.

"Any peace settlement must have a demilitarised zone controlled by Palestinians."

Netanyahu called for "immediate negotiations for peace without prior arrangements" from the Palestinians and said he was willing to meet Arab leaders anywhere to discuss the issue.

"I call the leaders of the Arab nations to co-operate with the Palestinians and with us on economic peace," he said.

"We want to live in peace and harmony with you ... we want our kids to dream of a better future and to realise it."

The two sides relaunched their negotiations at a US conference in November 2007, but the talks made little progress and were suspended during Israel's war on Gaza in December and January.

The Palestinians have said that they will not restart negotiations unless Netanyahu publicly backs the two-state solution and stops the building of Jewish settlements on Palestinian land.