JERUSALEM (Reuters) - Israel’s far-right foreign minister said on Tuesday peace efforts with the Palestinians had reached a “dead end,” on the same day U.S. President Barack Obama called for a Palestinian state alongside Israel.

Avigdor Lieberman, whose right-wing Yisrael Beitenu party is the second largest in Israel’s new coalition government, was speaking as Obama ended a trip to Turkey on his first trip as president to the Muslim world.

Obama said both sides needed to compromise for a two-state solution, as outlined in peace talks Israel launched with Palestinian President Mahmoud Abbas in 2007 at a conference in Annapolis, Maryland.

But Lieberman said of the Western-backed Middle East peace process: “There is definitely a regression here and we must understand and admit that we are at a dead end.”

Lieberman’s deputy added that Israel would not implement it’s obligation under a 2003 U.S.-backed road map peace plan to freeze settlement building until the Palestinians first fulfilled their commitment to rein in militants.

The foreign minister himself lashed out at Western calls for Israel to resume peace talks promptly, saying Netanyahu’s government, which was sworn in last week, needed up to two months to draft new policy.

“We have never interfered with other people’s affairs and we expect of others not stand with a stopwatch in hand,” Lieberman said in a speech to members of his party.

“We expect them to allow us time for the government to put together a serious, real and responsible program,” he said, adding that Israel would come up with “new ideas.” He did not offer any specifics.

Lieberman has said Israel is not bound by the Annapolis understandings and Netanyahu has not publicly committed his government to pursuing the establishment of a Palestinian state alongside Israel.

He said Israel remained committed to the staged road map, but he did not “understand the logic” of skipping directly to negotiations over the core issues -- like borders and the future of Jerusalem -- before earlier stages of the U.S.-backed plan were fulfilled.

JEWISH SETTLEMENTS

Deputy Foreign Minister Danny Ayalon said Israel would meet its road map obligation to freeze Jewish settlements building, but only after the Palestinians first met their commitments to reign in militants.

“It is very clear the road map is something which is well structured, was universally accepted, also by the government of Israel. You know we abide by it,” Ayalon said.

Israel's Foreign Minister Avigdor Lieberman arrives to the first cabinet meeting of Prime Minister Benjamin Netanyahu's (not pictured) government in Jerusalem April 5, 2009. REUTERS/Menahem Kahana/Pool

In an apparent effort to bolster Abbas’s Western-backed government based in the occupied West Bank, Israel allowed the transfer of $12 million to the Hamas-ruled Gaza Strip, a quarter of the amount requested by the Palestinian leader to pay his government’s salaries.

Israel has been under international pressure to lift its restrictions on cash transfers to the Gaza Strip, which Hamas seized by force in 2007 after routing forces loyal to Abbas’s secular Fatah faction.

Some right-wing groups in Israel oppose the cash transfers, asserting that Gaza’s Hamas Islamist rulers could benefit.

In the West Bank, Israeli police shot dead a Palestinian whom they said drove a car into officers guarding the demolition of the Jerusalem home of a Palestinian who killed three Israelis in a bulldozer rampage last July.

It was the first such demolition since a military commission determined in 2005 that a policy of destroying a Palestinian attacker’s home was ineffective as a deterrent against future strikes on Israelis.

U.S. State Department spokesman Robert Wood said such demolitions and evictions are “unhelpful” and that the United States had raised these concerns with Israel.

Israeli Defense Minister Ehud Barak called the demolition “an important punitive step” and called for such measures to be carried out in a “much shorter timeframe” in the future.