The outgoing governor of Israel's central bank says the country should strengthen Palestinian leaders to help create an independent Palestinian state.

Stanley Fischer, an American-Israeli economist who is highly respected in Israel, told Army Radio that bolstering the Palestinian leadership is one move Israel could make to try to reach a peace agreement with the Palestinians.

Fischer says he believes it is possible to reach a peace deal in which Israel gives up most of the West Bank and keeps only the large settlement blocs in exchange for compensation to the Palestinians.

Fischer, formerly of the World Bank and International Monetary Fund, has served as the Bank of Israel's governor for eight years. He is stepping down this month.