The European Union has cautiously welcomed Israel's endorsement for a Palestinian state.

But there will be strict conditions attached to the endorsement - Israeli Prime Minister Benjamin Netanyahu said the state must be demilitarised and the leaders of the Palestinian Authority must defeat the Islamist group Hamas.

President Mahmoud Abbas's Palestinian Authority runs the Israeli-occupied West Bank but his Hamas opponents seized control of the Gaza Strip two years ago.

In his keynote speech, Mr Netanyahu said: "They must decide between the way of peace and the way of Hamas. The Palestinian Authority must impose law and order and overcome Hamas. Israel will not negotiate with terrorists trying to destroy it.

"I appeal, from here this evening, to the leaders of the Arab states and say: Let's meet.

"Let's talk peace. Let's make peace. I am willing to meet with you any time, any place - in Damascus, in Riyadh, in Beirut."

But the speech was dismissed by a spokesman for Mr Abbas, who said: "Netanyahu's remarks have sabotaged all initiatives, paralysed all efforts being made and challenges the Palestinian, Arab and American positions."

Czech Foreign Minister Jan Kohout, whose country holds the EU's rotating six-month presidency, said: "In my view, this is a step in the right direction. The acceptance of a Palestinian state was present there."

Foreign Minister Carl Bildt of Sweden, which will take over the EU presidency in July, called it "a small step forward".

"That's good but it's only a first step. A state can't be defined as anything...the fact that he uttered the word is a small first step," Mr Bildt said.

Finnish Foreign Minister Alexander Stubb, when asked if Mr Netanyahu's move was sufficient for the EU to upgrade ties with Israel, said: "No".

French Foreign Minister Bernard Kouchner has also called Mr Netanyahu's speech a step forward.

"But to secure peace means going well beyond that, without laying down any pre-conditions to negotiations," he said.

US President Barack Obama called Mr Netanyahu's shift on Palestinian statehood an "important step forward".

But aides to Mr Abbas denounced the speech as "sabotaging" negotiations by restating Israel's refusal to share the city of Jerusalem or accept Palestinian refugees.

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