In addition to $20 million in aid to the Palestinian Authority, President Bush said he is sending his Treasury and Commerce secretaries to the Mideast this fall to report on steps to establish a Palestinian state.

The president also announced the formation of a joint Palestinian development group to help the Palestinians create an economy of their own.

"This group of American and Palestinian officials will meet regularly and be charged with finding practical ways to bring jobs and growth and investment to the Palestinian economy," Bush said  in a Rose Garden press conference with Palestinian Prime Minister Mahmoud Abbas (search).

The two met Friday at the White House for lunch, at which time Abbas asked Bush to "push the Israeli government to fulfill its commitments" toward Middle East peace.

Abbas wants Bush to convince Israel to stop building settlements in the West Bank, to release up to 3,000 Palestinian prisoners and to stop construction of a security fence aimed at separating Israel from Palestinian areas.

He also said Israel must lift its siege on President Yasser Arafat, who is holed up at Palestinian Authority headquarters in Ramallah; Israeli withdrawal from Palestinian territories; and the easing of checkpoints to allow greater freedom of movement.

And repeating a demand that Israelis refuse to negotiate on, Abbas called for the placement of the Palestinian capital of East Jerusalem. He also made no mention of terrorist groups that have created obstacles to peace and have been ordered dismantled under the road map.

Bush, who warmly received the prime minister and praised the Palestinian Authority for helping to build trust, said security must come first.

"I'm going to tell you point blank that we must make sure that any terrorist activity is rooted out in order for us to be able to deal with these big issues," he said. 

Asked how he would respond to Abbas' requests, Bush said that he thinks the wall is a problem because it prevents confidence-building between the two states. He also said that Israelis have already made progress in taking down checkpoints.

"We ought to look at the prisoner issue on a case-by-case basis. Surely, nobody wants to let a cold-blooded killer out of prison that would help derail the process. I mean after all it doesn't make any sense if you've got somebody who is bent on destroying lives and killing people in prison.  If you were to let them out, it would make it harder to achieve the peace we all want," Bush added.

The Israelis have released some prisoners, but U.S. Ambassador Dennis Ross said they won't agree to let all of them go.

"The essence of the prisoner issue for the Palestinians is that all those who have been taken by the Israelis are viewed as somehow political prisoners, even though the Israelis have taken them because these are people who carry out acts of terror. So, from the Israeli standpoint, they say we can't release large numbers, especially those who have blood on their hands, because they will go back to committing acts of terror," Ross told Fox News.

Despite claims of foot-dragging by either side, Palestinians and Israelis have made progress on their "road map" to peace since the June summits in Egypt and Jordan, White House officials say.

Bush's meeting with Abbas is the first time since the June summits that launched the president's personal involvement in the peace process.

White House officials say since then, the amount of violence in Israel has declined and restrictions have decreased on Palestinians. But both sides still claim the other hasn't done enough to meet the objectives of the road map created by the United States, Russia, the European Union (search) and the United Nations to solve the 50-year conflict.

While the bloodshed has subsided since Abbas took over as prime minister, it has not entirely ended. On Friday, an Israeli soldier in the West Bank shot and killed a 4-year-old Palestinian boy and wounded two other children.

The army called the shooting an accident, but a Palestinian official said the soldier fired unprovoked at a vehicle waiting at a roadblock.

On Thursday, Abbas told the Council of Foreign Relations that Israel "continues to grab Palestinian land" and the burden of preserving a cease-fire against terrorist attacks rests on Israel's shoulders.

If occupation of the West Bank continues, the Palestinian Authority, which negotiated the cease-fire with Hamas and Islamic Jihad, "will be put in a very embarrassing situation that no one will envy," Abbas told the assembled foreign policy experts, government officials and journalists.

The prime minister also told lawmakers on Capitol Hill Thursday that it would be easier to take action against Hamas if Israel would release Palestinian prisoners.

"They should tell them that it is very critical, very important to the Palestinian people to release all the prisoners. Because the prisoners are the constituency of the peace in Palestine."

However, congressional leaders are demanding that Abbas crack down on terrorist groups like Hamas and Islamic Jihad. Israel has offered to release some Palestinians but refuses to release many prisoners who are said to be members of those groups.

Officials say the current cease-fire is not a substitute for dismantling those groups though the topic did not come up in Friday's press conference.

Secretary of State Colin Powell seemed to put a wrench in U.S. demands Thursday when he did not insist that the groups break up.

Instead, Powell told the Lebanese Broadcast Corp. and the London-based Arab newspaper Al-Hayat that they must eliminate "all capability to conduct terrorist activity" if they wanted to play a role in the future.

Elaborating later at a news conference, Powell said Hamas "has a social wing that does good things." He said Hamas would be a different organization if it gave up its weapons and abandoned terrorism.

Dissenting from the praise showered on Abbas, Morton A. Klein, president of the Zionist Organization of America (search), said in a statement: "Just like Arafat, Abu Mazen (Abbas) is required to treat Hamas and Islamic Jihad as terrorists and enemies. And just like Arafat he treats them as brothers and comrades."

Not all of Abbas' remarks related to demands on Israel. He did say the Palestinian state would be built on the same foundations as the United States.

"We do not merely seek a state, but we seek for a state that is built on the strong foundations of a modern constitution, democracy, transparency, the rule of law and free market values," he said.

Such remarks, repeated Thursday to lawmakers, impressed Sen. Joseph Biden of Delaware, the senior Democrat on the Senate Foreign Relations Committee. Biden said he is impressed with Abbas' "sense of determination and optimism" and issued a statement saying "the committee welcomed his emphasis on the need to build bridges between Palestinians and Israelis and his willingness to denounce and marginalize Hamas and other terrorist organizations."

The White House rolled out the red carpet for Abbas, finding him to be a much better partner for peace than Arafat, with whom Abbas keeps close ties. The White House says Arafat is too entwined in corruption and terror to lead, but Abbas is moderate enough to affect changes.

Still, Abbas does look out for Arafat. The Palestinian Security Chief Mohammaed Dahlan, who is traveling with Abbas, met with National Security Adviser Condoleezza Rice, and repeated the oft-noted request that Israel lift its confinement of Arafat.

Abbas' visit to the White House precedes one by Israeli Prime Minister Ariel Sharon, who will be visiting on Tuesday. He is expected to have his own demands on what the Palestinians need to accomplish before they can have a state by 2005.

White House officials say privately that both the Israelis and Palestinians always come to the United States with lists they want the president to pressure the other side to do. They say Bush's goal is to get them to fulfill their own responsibilities.

Fox News' Wendell Goler and the Associated Press contributed to this report.