The United States joined with the United Nations, the European Union and Russia on Thursday in calling for an international Middle East peace conference that would plot Palestinian statehood.

President Bush stressed, however, that such a state must be democratic and not based on a foundation of terror and corruption. His statement, at a news conference, also renewed his description of Israel's hold on the West Bank as an "occupation" and said it must yield to Palestinian statehood.

Secretary of State Colin Powell, after meeting with U.N., European and Russian officials, announced they had agreed to plan the international conference for early this summer to try to advance the peace efforts. It probably would be in Europe and at the foreign ministers' level.

He said the conference would deal with security, economic reform, humanitarian issues and "the political way forward" to a Palestinian state.

"It's something that the parties in the region will welcome," he said.

Meanwhile, Powell urged Israel to lift restrictions on Palestinian travel and said Palestinian leader Yasser Arafat should take steps to bring calm to the region since he's now free from Israeli confinement.

Also, Powell said, "something will have to be done about the settlements" on the West Bank.

"Mr. Arafat, I hope, will understand that he doesn't have many more chances to seize this kind of opportunity," Powell said.

Bush, too, called on Arafat to "show he can lead."

"I'm optimistic we're making good progress," the president said. "After all, a week ago, Yasser Arafat was boarded up in this building in Ramallah. ... He's now free to show leadership."

A senior U.S. official said that the reference to corruption by the president obviously referred to Arafat's organization and that the Palestinian leader needed to take steps toward peace if he was to remain a pivotal figure.

Bush was not specific about how much land he wants Israel to relinquish for a Palestinian state. That critical issue is likely to be aired at a White House meeting Tuesday with Israeli Prime Minister Ariel Sharon.

Last month, in demanding Israel reverse its incursion in search of terror suspects, Bush said "the occupation must end" in accord with 1967 and 1973 U.N. Security Council resolutions.

The resolutions did not specify whether Israel ought to withdraw totally from the land the Arabs lost in the 1967 Mideast war and failed to regain in the 1973 conflict. But Arab and European leaders are insisting on a complete pullout.

U.N. Secretary-General Kofi Annan has called Israel's actions in the area illegal, but Bush did not.

Annan, standing alongside Powell at their joint news conference, said he expected a U.N. report to be prepared on Israel's attack on the Jenin refugee camp "even if you cannot get on the ground."

Annan decided on Wednesday to abandon an inspection mission because of Israeli opposition. But he said Thursday there still would be an effort to collect information about events at the camp.

Bush was unusually tough on what he expects of the Palestinians.

"A Palestinian state must be achieved by negotiation of an end to occupation," he said. "And such a state cannot be based on a foundation of terror or corruption."

"A Palestinian state must be based on the principles that are critical to freedom and prosperity: democracy and open markets, the rule of law, transparent and accountable administration and respect for individual liberties and civil society."

Speaking after meeting with European leaders, the president said he expects more progress toward Middle East peace when he meets in Washington next week with Sharon and King Abdullah II of Jordan.

European Union leaders, meeting with Bush on trade and other issues, gave their backing to the U.S. diplomatic efforts. "We attach the utmost importance to the work that we can do jointly in the Middle East," said Spanish Prime Minister Jose Maria Aznar, who currently holds the presidency of the European Union.

Still, a bloody skirmish at the Church of the Nativity in Bethlehem dampened hopes for prodding Israel and the Palestinians into negotiations.

American intermediaries are working with the two sides, trying to revive a formula for ending Israel's siege of the shrine, first by determining how many terror suspects are holed up inside and then deciding how to deal with them, said a senior U.S. official.

Israel has offered the wanted men exile or trial in Israel, but the Palestinians are unlikely to choose an Israel trial, the official said.

Until the Bethlehem incursion is resolved, efforts to work out new security arrangements and consideration of another trip by Powell to the region are on hold.

Meanwhile, the White House chided Arafat for condemning Israel as "terrorists, Nazis and racists" and said it would be better for all sides to focus on peace issues.

The mild reprimand was delivered by spokesman Ari Fleischer in Bush's behalf. Emerging from Israeli house arrest, and hearing of the fighting at the Church of the Nativity, Arafat angrily accused Israel of willfully damaging the shrine.

"The president thinks the important step for all ... parties is for them to now ask themselves what can they do to bring peace to the region, not what can they do to speak ill of others," Fleischer said when asked about Arafat's rhetorical blast at Israel.