Updated

Palestinian leader Yasser Arafat welcomed President Bush's Mideast policy speech Monday as a "serious effort to push the peace process forward" in an official statement that ignored his calls for new Palestinian leadership.

Israeli Prime Minister Ariel Sharon echoed Bush.

A statement from Sharon's office said that "when the Palestinian Authority undergoes genuine reforms and a new leadership takes its place at its head ... it will be possible to discuss ways of moving forward by diplomatic means."

Palestinian officials insisted that was a decision only the Palestinian people can make.

Saeb Erekat, an aide to Arafat, said the president's call to replace the Palestinian leader – whom Bush did not identify by name in his speech – was not acceptable.

"President Arafat was elected by the Palestinian people in a direct election ... and President Bush must respect the choice of the Palestinian people," he said.

Throughout the Mideast, Arabs heard in Bush's speech an unacceptable call to topple Arafat and accused the U.S. president of retreating from his promise of even a provisional Palestinian state.

The speech was broadcast live on an Arab satellite station to a region that had for weeks been awaiting Bush's vision on how to jolt Palestinians and Israelis out of their violent impasse. Without strong U.S. intervention, many believe, neither side will ever agree to compromise.

"The Arab world will not sleep tonight," said Mohamed el-Sayed Said, Washington bureau chief for the Egyptian daily Al-Ahram, after watching Bush's 20-minute address from the White House Rose Garden.

"He practically demanded the removal of Arafat, the symbol of Palestinian unity," he said. "The Palestinians have elected Arafat and they will elect him again. If the Palestinians re-elect Arafat, are they going to be punished?"

In his address, Bush said peace requires a new Palestinian leadership – one "not compromised by terror." He 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.

"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.

In a statement, Arafat said the Palestinian leadership welcomes Bush's ideas "and finds them to be a serious effort to push the peace process forward."

"The Palestinian leadership and President Arafat hope that the details will be discussed during the direct and bilateral meetings with the American administration" and international mediators, the statement said.

Israeli Communications Minister Reuven Rivlin said Israel was pleased with the speech but rejected the concept of a provisional Palestinian state. He said Bush expressed a "vision of bringing the Palestinian people to democracy and reform, and then to negotiate."

Rivlin, a close ally of Sharon, said that according to the Bush formula, the first steps are up to the Palestinians to reform their administration and "get rid of all those terrorists who live there."

Though the Palestinians insisted the choice of leadership is their own to make and not up to the United States, Palestinian officials took heart in Bush's saying that ending Israeli occupation is the only way to achieve peace.

"It is the first time that an American administration recognized that the only solution for this conflict is to end the occupation and to have a state to live in peace beside Israel – this is a historic change in the American stance," said Palestinian Cabinet Secretary Ahmed Abdel Rahman.

In his speech, Bush demanded Israel withdraw to positions it held on the West Bank two years ago and to 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.

Erekat said the situation today is at its lowest point. "What we need is a real specified road map that will define the endgame of the peace process, that is ending the Israeli occupation," he said.