WASHINGTON (Reuters) - Israel said the United States "does not understand reality" as its leader arrived in Washington on Friday after President Barack Obama endorsed a longstanding Palestinian demand on borders of a future state.
In a policy speech on the eve of Israeli Prime Minister Benjamin Netanyahu's visit, Obama laid down his clearest markers yet on the compromises he believes Israel and the Palestinians must make to resolve the decades-old conflict.
Obama embraced the Palestinian view that the state they seek in the occupied West Bank and Gaza Strip should largely be drawn along lines that existed before the 1967 war in which Israel captured those territories and East Jerusalem.
The right-wing Netanyahu, who has had strained relations with the Democrat Obama, reacted by saying in a statement that this could leave Israel with borders that were "indefensible."
"There is a feeling that Washington does not understand the reality, doesn't understand what we face," an official on board the plane taking Netanyahu to Washington told reporters.
"The prime minister's tough response expresses the disappointment with the absence of central issues that Israel demanded, chiefly the refugee (issue)," he added. Israel says it cannot accept a Palestinian demand to give millions of refugees the right to return from neighbouring countries.
Asked why he gave such a strong rebuttal to Obama's remarks, Netanyahu told reporters on board his plane: "There are things that can't be swept under the carpet."
Israel has also underlined its position by announcing the approval of plans to build 1,550 housing units in two Jewish settlements on annexed West Bank land around Jerusalem.
Obama's first outright declaration of his stance on the issue of borders could help ease doubts in the Arab world about his commitment to acting as an even-handed broker.
But the prospect of any significant progress to revive long-stalled peace talks, which the White House talks had anyway not been expected to deliver, seemed dimmer than ever.
A round of talks brokered by Washington at Obama's initiative collapsed last year when Netanyahu refused to extend a moratorium on Jewish settlement building in the occupied West Bank and Abbas refused to carry on negotiations.
There was no word on whether Netanyahu, who heads a right-leaning, pro-settler coalition, had been forewarned of the content of Obama's speech.
Israeli officials appeared especially taken aback by his blunt language, including criticism of "settlement activity" and its continued occupation of Arab lands.
"The viability of a Palestinian state cannot come at the expense of Israel's existence," Netanyahu said in a statement.
He said he expected to hear "a reaffirmation from President Obama of U.S. commitments made to Israel in 2004" -- an allusion to a letter by then president George W. Bush suggesting the Jewish state may keep big settlement blocs under a peace pact.
Netanyahu has also said he would want to keep Israeli forces in the valley that divides the West Bank from Jordan even after any establishment of a Palestinian state. And he rejects any discussion of giving up Israeli control of East Jerusalem.
Despite the tensions, Obama carved out three hours for Netanyahu on Friday, including a working lunch. Visits have not always gone smoothly, however.
HISTORY OF TENSION
In March last year, Israel angered Washington when an announcement of plans to build hundreds of dwellings in a settlement was made during a visit by Vice President Joe Biden.
Shortly afterwards, Netanyahu was left cooling his heels while Obama went to the White House residence for dinner with his family, widely seen in Israel as a snub.
In Thursday's speech, Obama said: "We believe the borders of Israel and Palestine should be based on the 1967 lines with mutually agreed swaps" of land.
While this has long been the private view in Washington, Obama went further than U.S. officials have gone in the recent past, when they described such a solution as a Palestinian aspiration but did not embrace it as their own.
Agreed swaps would allow Israel to keep settlements in the West Bank in return for giving the Palestinians other land.
Some Israeli commentators said Netanyahu might have hinted at some room for manoeuvre on the issue in a speech to parliament, the Knesset, on Monday.
They said his insistence that Israel must retain "the settlement blocs," the first time he has used that phrase, could suggest a willingness to evacuate small, isolated settlements.
In a BBC interview after his speech, Obama said Israel was "going to have to feel confident about its security" before it would be expected to agree to a border arrangement.
To reassure Israelis, Obama recommitted to Israel's security and said any future Palestinian state must be "non-militarised," something Netanyahu has demanded.
But he warned Israel: "The dream of a Jewish and democratic state cannot be fulfilled with permanent occupation."
Obama also delivered messages that will be hard for the Palestinians to swallow, suggesting that they have a lot of explaining to do about a reconciliation deal with Hamas, the Islamist group that runs Gaza, which the United States regards as a terrorist group.
Palestinian President Mahmoud Abbas welcomed Obama's efforts to renew negotiations, and made plans to convene an "emergency" session of Palestinian and Arab officials to weigh further steps, a senior aide said.
But he did not comment on Obama's firm rejection of a Palestinian drive to seek recognition of their statehood at the annual meeting of the U.N. General Assembly in September.