U.S. Secretary of State Hillary Clinton warned on Friday that without progress toward peace, Israel will be forced to choose between "preserving democracy and the Jewish identity of the state."

Speaking at the Saban Forum 2012 at the Willard InterContinental in Washington D.C., Clinton rejected Foreign Minister Avigdor Lieberman's pessimism concerning the Palestinian Authority's capability of governing its territory and bring about a lasting peace.

"With very little money, and no natural resources, they have accomplished quite a bit, building a security force that works every single day with the IDF (Israel Defense Forces). They have entrepreneurial successes. They are nationalistic - but largely secular. Israel should support them."

"Some Israelis claim [Palestinian President Mahmoud] Abbas is not a partner for peace," Clinton continued, "Well, I think that should be tested."

Turning to the situation in the Gaza Strip, the secretary of state said, "That fragile cease-fire is holding, the skies above Israel are clear... but the world knows - and always will know - that whenever Israel is threatened, the U.S. will be there. What threatens Israel threatens America, what strengthens Israel, strengthens America."

Clinton warned the Hamas, which controls the Gaza Strip, that "If more rockets are smuggled into Gaza, it will lead to more violence. We will never work with terrorists. Hamas knows what it needs to reunite Palestinians and rejoin the international community."

Clinton said she wasn't nave about the prospects for achieving a lasting peace. She explained that she thought "that even if you cannot reach complete agreement, it's in Israel's interest to try. It gives Israel a moral high ground that I want Israel to occupy. That's what I want Israel to occupy."

"Rockets launched from Gaza at Tel Aviv only stress what we already know - the international community must prevent Iran from acquiring nuclear weapons," Clinton segued. "The Iranian regime already exports terrorism around the world. Nuclear Iran is a threat not only to Israel; it's a threat to all nations. The U.S. will not have a policy of containment, but prevention, built on a dual track of sanctions and dialogue."

Clinton said the United States tried to engage the Iranians in bilateral negotiations but that they refused.

"Protecting Israel's future is not simply a matter of policy for me, it's personal," Clinton said, turning to a more personal tone as she recalled her visit to Israel shortly after her daughter Chelsea was born. The secretary of state, who will soon be ending her service, added, "I know with all my heart how important it is that our relation goes from strength to strength. I am looking forward to returning to Israel as a private citizen on a commercial plane. It's not a great secret I hope to become a grandmother one day - and I hope one day to take my grandchildren to Israel."

Open gallery view Will she or won't she? Secretary of State Hillary Clinton at the 2012 Saban Forum. Credit: Natasha Mozgovaya