This is a partial transcript of Special Report with Brit Hume, July 1, that has been edited for clarity. Click here to order the complete transcript.

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BRIT HUME, HOST: Joining us now from the State Department is Secretary of State Colin Powell (search).

Mr. Secretary, thank you for doing this.

COLIN POWELL, SECRETARY OF STATE: Thank you, Brit. Good evening.

HUME: Could you clear up something for me? I noticed you were asked the other day about the ingredients of this new progress that's being made down in the road map, so to speak, and you mentioned Mahmoud Abbas' (search) presence, you mentioned the will of people on both sides, the conflict over there and the involvement of the president. You did not mention the outcome of the war in Iraq as having had an effect there. Did it in your judgment or not?

POWELL: I think it did because with the end of the war in Iraq, and the removal of the Saddam Hussein regime, one of threats to Israel was eliminated. And frankly, the power equation in the Middle East, in the Gulf region, changed. And I think that gave Prime Minister Sharon more flexibility in the decisions that he might make.

And after that was done, the president was able to devote his full attention to getting the road map underway. And then, of course, with the elevation of Prime Minister Abbas to prime ministership, the conditions were met for the presentation of the road map.

And it's rather fascinating to see what's happened just in the past month. From concern that we weren't going anywhere to presentation of the road map, and then the Sharm el Sheik and Aqaba Summits and then progress we've seen so far on both parties -- that have been made by both parties.

And today was a fascinating day as well to see the two prime ministers out there talking about peace, talking about reconciliation and promising to work with each and cooperate with each other. So this is very hopeful, Brit.

HUME: As you go forward, Mr. Secretary, what are you most worried about that could interfere here?

POWELL: What I'm worried about is remaining terrorist organizations that have not given up the quest to destroy the state of Israel and do not want peace.

HUME: What are you talking about specifically there?

POWELL: I'm talking about Hamas. I'm talking about Palestinian Islamic Jihad. I'm talking about the al Aqsa Brigade. They have entered into a cease-fire, but as long as they have the capability to conduct these kinds of attacks, they can come out of a cease-fire at some time in the future. So we hope they'll stay with the cease-fire. But ultimately we are going to have to convert this kind of organization and organizations that no longer are interested in using terror as a political weapon.

And I believe that's also the commitment of Prime Minister Abbas. As he has said, the armed Intifada must end. And he has also said those who have guns within any state must be under the control of the government. The government has to have the power, the military power, the armed power in a democratic state. And I hope he will continue to believe in that and move this that direction.

HUME: The president has spoken of dismantling Hamas. Can that be done?

POWELL: Well, it remains to be seen what Hamas chooses to do as it moves forward. Hamas has a social wing to it where it provides services to people, but it has this armed militant wing that is determined to destroy the state of Israel. These two wings cannot live separate lives. They are one organization. And until Hamas abandons all effort to conduct terrorist activity and all intent to conduct terrorist activity, then we have to be hard on all of Hamas. So, we'll see how this evolves in the days ahead.

I think it's very -- very good right now that we have the transfer of responsibility in Gaza, hopefully in Bethlehem within the next day or so, and the cease-fire in place that seems to be holding, even though there had been two incidents, one yesterday and one today. But they seem to be minor incidents. And I hope it will hold. We can't let these minor incidents or a single incident destroy the promise of the road map that is now before us.

HUME: Mr. Secretary, the French and others are calling on the United States to send forces in and get deeply involved in that messy situation in Liberia (search), where blood continues to flow in the streets of Monrovia, a dangerous and messy situation. What is the United States prepared to do there?

POWELL: We're examining the situation very carefully. There is a lull in the fighting right now between the rebel forces and the government.

President Bush has called on President Taylor to step down; he is now an indicted war criminal. And we are concerned about the humanitarian situation in the streets of Monrovia and all of the displaced people.

So, we're in close touch with the United Nations. I've had a number of conversations with Secretary-General Annan over the past week and we're examining our options as to what we might do. But the president has not yet made any decision. We have not provided the president with a recommendation from his national security team yet.

HUME: So, would you rule forces in, rule U.S. forces in or out or not at all?

POWELL: The president is examining all of the options, all of the possibilities. I wouldn't rule anything in or out yet.

HUME: In Iraq, I think that people reading front pages and perhaps watching certain news broadcasts could come away with the impression that the United States, having won the war, is now in the process of losing the peace. What is your reaction to that?

POWELL: That's not -- simply not true. We had a meeting with Ambassador Bremer this morning by video teleconferencing, and he was pretty upbeat. While we see the same things that you see, Brit, on television and our morning papers, there are a lot of good things that are going on. Our brigade commanders out in the fields now have money to help rebuild schools and other facilities and all of the communicates in which they are working in stations. The economy is slowly starting to get up to speeds again. It will take a long time, but it's slowly starting to move. The oil is starting to flow.

There are still terrorists there. There are still Baath Party (search) members who don't want to give it up. There are still Fedayeen and others who are determined not to see peace. But I think over time, our military forces and a renewed Iraqi police force will be able to deal with these elements, provide a level of security throughout the country so that we can get the infrastructure up and running: the electrical system, the sewage system, the water system.

And that will start to show the Iraqi people that they're going to have a better life. And the coalition will help them to that better life. As soon as possible, we want to transfer responsibility to Iraqi officials so that they have responsibility for their own country, their own people, and their own destiny.

HUME: We have about a minute left, Mr. Secretary. Has this phase of this proved more difficult and bloody than the United States may have anticipated?

POWELL: It's proven to be difficult. I don't think any of us were naive about the difficulties we were facing. In conversations that I had with the president, I had with my other colleagues in the National Security Council, we discussed the very real likelihood that after this conflict, there might be the collapse of all law and order and entire regime and all the institutions of regime. And that's happened. So, we have 24 million people who are looking for institutions to be recreated and for order to be restored. And we are hard at work in that and I'm quite confident we will succeed.

HUME: Secretary of State Colin Powell, thank you very much for joining us.

POWELL: Thank you very much, Brit.

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