Israeli Prime Minister Ariel Sharon has called for reconciliation and compromise with Palestinians to "end the bloody conflict".
Ariel Sharon said search for peace was his primary mission
In a speech at the UN in New York, Mr Sharon said the two sides must "embark on the path which leads to peace".
He said Israel proved its readiness for "painful concessions" by pulling its army out of the Gaza Strip on Monday.
A Palestinian official responded that the only solution was Israel's complete pullout from the occupied territories.
"The way to peace and stability is through an end to occupation," Palestinian chief negotiator Saeb Erekat was quoted as saying in Gaza by Reuters news agency.
Other Palestinian officials said the statement lacked credibility because of Israeli plans to expand settlements in the West Bank and build its separation barrier.
In his emotional speech, Mr Sharon also said Palestinian leaders should now fulfil their pledge to end "terror" activities by militant groups.
He added that the Palestinians were entitled to freedom and to a national sovereign existence in a state of their own.
However, he described Jerusalem as "the undivided and eternal capital" of Israel.
Nonetheless, the prime minister's comments have put the onus firmly on the Palestinian leadership to take charge, the BBC's Jonathan Marcus at the UN says.
They could be seen as a hint that Israel just might be prepared to go further to end the conflict, our diplomatic correspondent says.
Mr Sharon was speaking shortly after Israel's Supreme Court ruled that the government must consider re-routing part of the controversial West Bank barrier still under construction.
The court ordered the government to consider other options for the route, but rejected last year's world court ruling that the barrier was illegal and should be dismantled.
Also on Thursday, Palestinian leader Mahmoud Abbas said the situation at the border between the Gaza Strip and Egypt had been brought under control following several days of chaos.
Thousands of Palestinians streamed over the border freely after Israel's pullout from the area on Monday.
The number of people crossing the border on Thursday has slowed to a trickle, reports say.
A group of Palestinian lawmakers, meanwhile, filed a motion of no-confidence against Prime Minister Ahmed Qurei, blaming his government for the anarchy in the Gaza Strip and the West Bank.