This is a partial transcript of Special Report with Brit Hume, December 22, that has been edited for clarity.

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BRIT HUME, HOST: Israeli troops and tanks killed eight Palestinians during a raid in a refugee camp in the Gaza Strip today. The raid occurred just two hours after two Israeli soldiers were killed in the Jewish settlement of Netzarim; although the Israeli army said the two events were not linked.

Last night, FNC correspondent Rick Leventhal had a report on this broadcast about Netzarim, which is one of the outposts Israeli Prime Minister Ariel Sharon (search) has suggested could be abolished as part of a unilateral set of moves, Sharon said, Israel was prepared to take unless there was movement on the Palestinian sides along that U.S.-backed Road Map toward peace in the region.

The set of possible steps outlined by Sharon, included the completion by Israel of the controversial security fence that now extends across part of Israel's boundary with the disputed territories. Sharon's statement was frowned on by Washington and widely seen as a threat by Israel. But was it a threat or a promise?

For answers, we turn to Fox News contributor Dennis Ross, a top adviser and Mid East emissary for both of the last two American presidents. Dennis, welcome.

DENNIS ROSS, FMR. U.S. ENVOY: Nice to be here.

HUME: Dennis, outline if you can, quickly, what it is that Sharon said in the speech that was interpreted variously, shall we say?

ROSS: Well, let me point out what, I think in fact, were quite significant statements that he made, that maybe didn't get the kind of attention they should have. First, he said something that, in fact, on settlements, Israel will not build settlements out any longer. Now, that is new. In the past, when they talked about natural growth, they would still expand them out and they would take more territory.

Now he said we will not -- we Israel will not build beyond the construction line. What that means is they will build up, but they won't build out. When we were at Camp David, even Yasser Arafat (search) said the actual territory of the settlements in the West Bank was about 1.7 percent of the territory. The big issue for the Palestinians is are the Israelis taking more land that they think should be theirs. So if they're not building out, but they're building up, that is a significant departure.

HUME: More populations in those areas but no more land taken.

ROSS: That's right. That's the significant departure.

Two, Ariel Sharon is the architect of the settlement movement in Israel. He is the one who built the settlements and he is the one who's now saying we are going to evacuate some. I'm not going to tell you precisely which ones they're going to be, but they're going to evacuate some.

HUME: So, there will be retrenchment in some areas where there are now settlements. They're going to pull back...

ROSS: That's right.

HUME: ... leaving the territory in the hands of the Palestinians?

ROSS: That's right. And that gets to the third point that was significant. He used the term disengagement, meaning we're going to disengage from the Palestinians and that's why there is going to be a pullback. In fact, what he is talking about is a partition of the territories. And that's how you get two states, one part of it is the Palestinians', the other part is the Israelis'.

Now here again, Ariel Sharon, regardless of the fact that he hasn't necessarily defined precisely what he is going to do, he has created a new baseline. He has created, in a sense, a new reality for Israel, regardless of what happens in the future. Everyone now knows, you are going to have a partition. The question is where exactly is the partition going to take place and is it going to be done through negotiations or is it going to be done unilaterally?

HUME: Now, what he said was if there is no movement on the Road Map, as to say no negotiations and in steps by both sides, that would float from that, presumably in his particular interests being in...

ROSS: Security.

HUME: ... security for Israel that he is going to go ahead and take these measures unilaterally and it's going to include the building of that -- the completion of that fence. Now, that fence will be drawn along what borders?

ROSS: Well, that is something that's still to be determined. But one of the things he said is he will coordinate every step with us. Which is to say that he is not going to build a fence in a way that the U.S. has as problem with.

HUME: Now we see this fence. In some places it's a wall, but in most places it is a fence, like the one...

ROSS: Eighty- three miles have been constructed. Of the 83...

HUME: Now, how many miles would it take a fence to complete the job?

ROSS: They're going to have to do -- this is little less than one third of what they have to do. If it is on the western side of the West Bank, there could be two fences. And if it's built on the western side, then basically it's a buffer for Israel. If it is built down the spine of the West Bank, then it encircles the Palestinian. Then it looks like less of a buffer for Israel and more like a buffer for the settlements.

Now, Ariel Sharon hasn't said what he is going to do with regard to that eastern fence. But He said he is going to coordinate what he does with the administration and the administration has made it clear they are against the eastern fence.

Two points here. The first is he said he wants to negotiate. His first preference is to negotiate with the Palestinians. In fact, he says the Palestinians will do better in a negotiation with Israel. And I know the Palestinian prime minister quite well; Abu Allah, he is ready to negotiate.

HUME: He's the one we refer to as Qorei, right?

ROSS: That's correct. He is ready to negotiate with Prime Minister Sharon and I think we will probably see, within a week to 10 days, we will probably see a meeting between the two of them. The issue is not whether they may be able to reach an agreement. I believe, in fact, they can reach an agreement. The Question is, will it last? The key to this is going to be ... will Yasser Arafat allow it to hold for some period of time. Will Hamas go along with it for some period of time?

The record of the past suggests not. Now, if that's the case that really leads to the second point. The notion of the Israelis doing a pullback is treated by some as being a terrible thing; but look at the reality. If the Palestinians are unable to carry out the security responsibilities, the Israelis have two choices. Either they maintain a siege over the Palestinians, 160 checkpoints, Palestinians can't move. They can't breathe. They can't do business. Or the Israelis pull back to a fence and they lift the checkpoints and they get out of Palestinian lives.

Now, have ... if the Palestinians aren't able to do security, then the best alternative, actually, is a fence or a barrier.

HUME: Now, the reason why Israelis are so high on -- or some of them are so high on this idea of a fence is that I gather as far as Gaza is concerned, where the rest of the Palestinians are, which is home of Hamas, correct?

ROSS: It's based there. Although, they're known in the West Bank now.

HUME: I'm sure. But there is a fence around Gaza.

ROSS: That's correct.

HUME: And the fence has been effective ... has it been in keeping terrorists out?

ROSS: Here are the facts. In the three years of this Infitada/war, there has not been a single, successful suicide bombing out of Gaza. Out of the West Bank, there had been 55 successful suicide bombings and another 70 successful penetrations, but people were intercepted once they were in Israel. So, it is not surprising if you are an Israeli, you say, if it's good enough for Gaza, why not the West Bank as well?

HUME: And so the state of play, the new facts that would exist on the ground, if Sharon carried out this plan because of lack of diplomatic progress, there would now be a fence along a border that would be, in effect, a border between the two states or territories?

ROSS: What he is saying and what the administration has insisted upon, and it is right to do so, that whatever the -- wherever the barrier - - we'll call it a barrier. The Israelis call it a fence, the Palestinians call it a wall, so we'll call it barrier. Wherever the barrier is built, it does not constitute a political border. It constitutes a security measure, a security line.

HUME: Subject to revision, being torn up and moved later.

ROSS: Absolutely. Which, by the way, you know, there was a -- when the Israelis withdrew from Lebanon there was a fence that they had built up. They had to move it twice to meet the terms of the U.N. to satisfy the city Security Council resolution.

What the Ministry of Defense in Israel is planning on right now is a fence that would absorb about 14.5 percent of the West Bank. Now that means you're talking about 85.5 percent of the West Bank that is not affected by the fence. It is true that a certain -- a small number, you're talking about maybe 50,000 to 60,000 Palestinians out of about 2.1 or 2 million would be on the wrong side of that fence. Or others could be on one side of the fence and have their fields on it. So, you have to create gates. You have to make allowances...

HUME: You have to have some checkpoints and gates, right?

ROSS: Absolutely. You have to minimize the disruption of the lives of the Palestinians. But it is a whole lot better for Israelis to pull back, get out of Palestinian lives, lift 160 checkpoints and allow most of the Palestinians to live without Israeli control than to maintain the siege.

HUME: This is an interesting idea; I take it, you think?

ROSS: It is. I think it is an important idea if, in fact, diplomacy doesn't work. And my first preference, as you know, would be diplomacy. But if it doesn't work, you don't throw up your hands and say that's it.

HUME: We have to take a break to bring you the rest of the headlines.

Thank you Dennis.

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