ANNAPOLIS, Md. — Israel’s prime minister today said it is “inevitable” that the territory his country won in the 1967 six-day war would be relinquished in the creation of a Palestinian Arab state.

“I have no doubt that the reality created in our region in 1967 will change significantly. While this will be an extremely difficult process for many of us, it is nevertheless inevitable,” Ehud Olmert said at the start of a one-day peace conference here before representatives of forty nations, the United Nations, and the Arab League.

President Bush today said the peace process he is launching should be finished by the end of his term in office. He has already won a key concession from Mr. Olmert, who yielded on his demand that final status talks be delayed until the Palestinian Authority was able to take action against terrorism.

President Abbas pledged a commitment to ending terror, but he was also frank that his security services — vanquished in June by the Iranian-supported Hamas — needed to be rebuilt with international aid. On December 12, major industrialized nations will meet in Paris for a donors conference to rebuild Palestinian Arab institutions in the West Bank and Gaza.

Mr. Bush said that in light of the rise of extremism in the region, it is more vital than ever to press for a final settlement to the conflict. For the Israelis in particular, he said, “They must show the world that they are ready to begin to bring an end to the occupation that began in 1967 through a negotiated settlement. This settlement will establish Palestine as a Palestinian homeland, just as Israel is a homeland for the Jewish people.”

Mr. Bush called on Israel to remove illegal settlement outposts and end the expansion of the settlements. For the Palestinian Arabs, Mr. Bush said a Palestinian state must remove the “infrastructure of terror” and govern justly.

Mr. Olmert’s embrace of the new peace process is an evolution for the politician who won his first national election as a member of a new political party known as Kadima. Kadima was comprised of politicians from both the right-leaning Likud and left-leaning Labor that endorsed a strategy whereby Israel unilaterally withdrew from the West Bank as it had from Gaza, retaining the territory it wished to keep and leaving the Palestinian Arabs with the rest.

Mr. Olmert made certain to say that the new round of talks with his Palestinian Arab counterpart is based on prior agreements and understandings, including an April 14, 2004 letter from President Bush to the then prime minister, Ariel Sharon. In that letter, America acknowledged that some Israeli settlements in the West Bank would remain inside Israel’s final borders. Israel has expanded a ring of settlement blocks around its capital of Jerusalem while beginning to dismantle others that have cropped up in Palestinian Arab population centers.

The idea that Israel’s final borders would not exactly resemble its pre-1967 borders was first broached in the Oslo negotiations of the 1990s in the framework of land swaps; Israel would keep some West Bank land in exchange for relinquishing Palestinian Arab population centers on the east bank of the Jordan River. An agreement in Taba, Egypt in 2000 also endorsed the land swap principle.

Saudi Arabia however, and for that matter the Arab League, have said they would only support a peace deal based on Israel’s return of the land it won in 1967, a demand that would effectively re-divide the city of Jerusalem and cede Jewish holy sites, such as the remains of the second temple wall, to an Arab state.

The joint declaration between Messrs. Abbas and Olmert today makes no mention of the 2004 letter from Mr. Bush to Mr. Sharon. It does however say that America will “monitor and judge the fulfillment of the commitment of both sides of the road map. Unless otherwise agreed by the parties, implementation of the future peace treaty will be subject to the implementation of the road map, as judged by the United States.”

The discussions in Annapolis may be academic. Hamas now effectively controls Gaza and has waged a low intensity war on Mr. Abbas’s party, Fatah. In an interview here, Israel’s former ambassador to Washington, Daniel Ayalon, said it remained to be seen whether Israel had any kind of peace partner.

“Israel gave up really big concessions by agreeing to talk about key concessions before the Palestinians implemented anything,” he said. “The implementation of any agreement should not take place before Palestinians prove they are a trustworthy partner.”

Since Israel’s withdrawal from Gaza, the towns bordering that territory have faced a barrage of rocket fire. Until recently, major Israeli politicians from both the right and left have said no territory in the West Bank, with its borders abutting Jerusalem, Ben Gurion Airport, and its nuclear missile silos in Dimona, should be ceded to the Palestinian Arabs until the state could defend against the threat of the rockets.