Prime Minister Ehud Olmert said on Monday that Israel was prepared to withdraw from considerable Palestinian territory in exchange for peace.
"We are ready to withdraw from considerable territory in exchange for peace with the Palestinians," he told a ceremony in the Negev desert marking the anniversary of the death of Israeli's first premier, David Ben Gurion.
"I propose to you engaging on a new path. We started yesterday" when a ceasefire in the Gaza Strip came into effect, Olmert said on the second day of the tenuous ceasefire in the Palestinian territory.
"If a new government (Palestinian) comes about and commits to the principles of the quartet, which will make the roadmap work, which will release Gilad Shalit, I propose an immediate meeting with Abu Mazen (Palestinian president Mahmud Abbas) to engage in open, sincere and serious dialogue," he added.
"In that framework and in keeping with the roadmap you could create an independent and viable Palestinian state with territory in Judea and Samaria (the West Bank), a state with total sovereignty with defined borders," he said.
Israeli soldier Shalit was captured by Palestinian groups in late June during a cross-border attack claimed by three armed wings, including that of the ruling movement Hamas.
His seizure sparked five months of Israeli operations in the Gaza Strip, where around 400 Palestinians and three Israeli soldiers were killed before the tenuous ceasefire came into effect on Sunday.
Under the ceasefire agreement, Palestinian militants are to stop near daily rocket attacks on the Jewish state and Israeli troops withdrew from Gaza on Sunday.
Despite initial violations on Sunday shortly after the ceasefire came into effect at dawn, the truce was holding on Monday.