Israeli Prime Minister Ariel Sharon stood both firm and flexible Monday, rebuffing President Bush's call for a withdrawal from Palestinian territory while stating his willingness to meet with Arab leaders, anywhere and without condition, to discuss a lasting peace arrangement.

In a speech to the Knesset, Israel's parliament, Sharon said an Arab initiative, which called for Israel's withdrawal from all occupied lands in exchange for comprehensive peace, had "positive elements."

He also said that Israel's military offensive in the West Bank would continue, despite demands by the United States that troops begin their withdrawal from Palestinian towns immediately.

Addressing the Arab peace initiative, Sharon said Israel would not be able to accept Palestinian refugees and that borders would have to be negotiated without dictates from the Arab world. The prime minister has vehemently opposed a full withdrawal from the lands Israel occupied in the 1967 Mideast war.

The Arab initiative was formulated at an Arab summit in Beirut, Lebanon, last month, and marked the first time the Arab world joined to offer Israel a peace deal.

The plan was first floated a few weeks before by Saudi Crown Prince Abdullah. Sharon welcomed the fact that "an important Arab leader like Abdullah" had recognized Israel's right to exist.

But he added that "there is no significance to readiness for peace without readiness for meeting, talks and negotiations. I renew my call today to hold such a meeting between me and the moderate and responsible leaders in the Middle East. I am prepared to go anywhere, without any conditions from any side, and talk peace."

He said the United States should help bring about such a meeting and that he would discuss ways to do so with Secretary of State Colin Powell, who is expected in the region this week.

Regarding what Israel calls "Operation Defensive Shield," Sharon told the Knesset that the military campaign was limited in time, but would continue until Palestinian militias have been crushed.

"These missions have not been completed yet, and the army will continue operating as quickly as possible until the mission has been completed, until it has dismantled [Palestinian leader Yasser] Arafat's terror infrastructure and until the murderers hiding in different places have been arrested," Sharon said in a speech frequently interrupted by heckling, mainly from Arab legislators.

President Bush demanded over the weekend that Israel immediately withdraw from Palestinian areas. In 11 days of fighting, Israel has reoccupied six of the eight main Palestinian cities in the West Bank and has confined Arafat to a few rooms in his headquarters in the West Bank town of Ramallah.

About the U.S. demands, Sharon said that "we promised that we will expedite our operations and remove our forces from the places where we have finished."

He said Israeli troops would then withdraw to buffer zones, presumably in the West Bank, "to keep the terrorists away from our cities."

"At the same time, our forces will be ready to strike, selectively, those who want to continue to attack us," Sharon said.

Sharon said that Israeli forces have detained more than 1,500 wanted Palestinians, including more than 500 involved in attacks on Israelis, during the current operation.

The prime minister again branded Arafat a terrorist, and said the Palestinian leader was directly responsible for the shooting and bombing attacks on Israeli civilians in the past 18 months of fighting.

Addressing the Palestinian people, Sharon said: "We have no war against you and we do not want to control you. We want to live with you, side by side, with dignity and honor. [But] you must take your fate in your hands. ... You must reject the forces that have brought upon you catastrophe."

The Associated Press contributed to this report.