Ms Rice is making her seventh trip to the region this year

Condoleezza Rice said reaching a two-state solution was a priority for her and US President George Bush.

Ms Rice was speaking from the West Bank, where she has been trying to get agreement for a peace summit in the US.

Meanwhile the Israeli PM has hinted he may consider giving up Palestinian districts in Jerusalem in a peace deal.

Ehud Olmert told parliament "legitimate questions" could be asked about the Israeli annexing of outlying Palestinian neighbourhoods in East Jerusalem following the 1967 war.

Palestinians want East Jerusalem as the capital of a future state of Palestine, and the issue is one of the most sensitive and intractable of the Israeli-Palestinian conflict.

'It is time'

"Frankly it is time for the establishment of a Palestinian state," Ms Rice told reporters in a news conference which she held with the Palestinian leader Mahmoud Abbas.

Every time I visit, the situation seems to have worsened

John Dugard,

UN special rapporteur

Quartet's 'deaf ears'

She said the US regarded a two-state solution "as absolutely essential for the future, not just of Palestinians and Israelis but also for the Middle East and indeed for American interests".

She said Mr Bush would make finding a resolution a top priority of his time in office, and that she would devote her "last ounce of energy" to the issue.

Ms Rice said she wanted agreement on the peace summit, set to be held in Annapolis, Maryland - but that it would have to be "a serious and substantive conference that will advance the cause of a Palestinian state.

"We frankly have better things to do than invite people to Annapolis for a photo op," said Ms Rice.

The Palestinians have warned that if no tightly-worded text is agreed on which to base talks, they will not attend. The Israelis say they do not believe an agreed text is necessary.

Despite Ms Rice's assertion that the current diplomacy represented "the most serious effort to end this conflict in many, many years", the BBC's Aleem Maqbool in Ramallah cautions that huge differences remain between the two sides.

Ms Rice will now meet other regional leaders. She will need to convince them, too, that a peace conference will be worth turning up for, says our correspondent.

Difficult negotiations

At the same news conference, Mr Abbas said Israeli and Palestinian negotiators were working together.

"We are working on a joint document with the Israeli side. The document will set out the basis of the solutions to the final status issues: Jerusalem, borders, settlements, refugees, security, water and bilateral relations," he said.

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The Palestinians want detailed agreement and a timetable for the implementation of solutions to some of the key disputes, while the Israelis want a broader, more general document with no timetable. The disagreement has threatened to derail the conference entirely.

But on Monday, Mr Olmert appeared to suggest he might be open to compromise on one of the thorniest issues - the status of Jerusalem.

He questioned the logic of a decision to include Palestinian areas within the city's expanded boundaries after Israel captured them in the 1967 Middle East war.

"Was it necessary to annex the Shufat refugee camp, al-Sawahra, Walajeh and other villages and state that this is also Jerusalem?" Mr Olmert asked in a speech to the Knesset.

"I must admit, one can ask some legitimate questions on the issue," he told parliament.