Israel will take unilateral steps to separate from the Palestinians unless there is progress on the roadmap peace plan, Ariel Sharon has warned.
Sharon said settler outposts could be removed
These would include the dismantling of settler outposts and accelerating the building of the controversial security barrier in the West Bank, he said.
The prime minister added he would not "wait forever" for the Palestinians to "abandon the path of terrorism".
He gave the Palestinian Authority "a few months" to comply with the roadmap.
But Palestinian leaders reacted with anger to the speech.
Palestinian Prime Minister Ahmed Qurei said he was "disappointed that [Sharon] is threatening the Palestinians".
The major policy speech was the first time Mr Sharon has spoken publicly of dismantling Jewish settlements, the BBC's James Reynolds in Jerusalem says.
But he has been suggesting for more than a month that unilateral moves could be in the offing.
His popularity has been falling among Israelis amid the apparent stalemate between Israel and the Palestinians.
The idea of separation is popular with the Israeli public, our correspondent says, even if there are disagreements about the exact place lines would be drawn.
Mr Sharon reaffirmed his support for the roadmap peace plan in his speech, saying "It is possible, and indeed we must implement it."
He strongly criticised unofficial peace plans.
"The roadmap is the only plan that has been accepted by the Israelis, Palestinians... and the rest of the world," he said of the US-backed plan.
Other plans "mislead the public and encourage false hopes," he said in his speech in the town of Herzliya, near Tel Aviv.
He vowed not to confiscate any more Palestinian land or build new settlements in Palestinian territory.
He said Israel did not want to rule the Palestinians.
Ariel Sharon has been hinting at the possible steps
"We are interested in you running your own lives in your own democratic state with territorial contiguity in the West Bank," he said.
But, he warned, "if within a few months the Palestinians have not made reciprocal steps we will take unilateral action".
He was careful to not to use the word "borders" when talking about an Israeli pullback.
"The security line will not be the final border," he said.
Palestinian leaders were quick to condemn Mr Sharon's speech - as were Israeli settlers on the right and former Prime Minister Shimon Peres on the left.
Sheikh Ahmed Yassin, the spiritual leader of the Islamic militant group Hamas, called the plan "a delusion to fool the world".
"Sharon is asking Palestinians to raise white flags, to surrender. This is totally rejected by our people. We will not surrender and our people will defend themselves," he said.
The president of the Settlers' Council, Bensi Lieberman, said settlers would do "everything in our power to prevent these measures becoming reality".
White House spokesman Scott McClellan also expressed concern.
"The US believes a settlement must be negotiated and we would oppose any unilateral Israeli effort to impose a settlement," he said.