Egyptian President Hosni Mubarak, one of the few Arab leaders with diplomatic ties with Israel, said Mr. Netanyahu's words "scuttled" chances to end the conflict, a harsh reaction that could complicate President Barack Obama's efforts to push a solution to the Israeli-Palestinian conflict.

Israeli officials have emphasized that Mr. Netanyahu's acceptance of the creation of a Palestinian state in the speech marked a major shift from his previous policies both as leader in the late-1990s and as an opposition parliamentarian. White House officials have expressed cautious optimism for that stance, calling the Israeli position a good first step.

But Arab diplomats said they were disappointed with the tone of the address, calling Mr. Netanyahu's speech deeply ideological. They also were concerned over the narrow list of topics covered in the 28-minute speech. The Israeli leader did not refer to the Arab's own peace initiative that promises recognition of Israel in exchange for territorial withdrawal and its compromise on the other core issues such as the status of Jerusalem and the issue of refugees. Nor did he commit himself to removing settlements in the West Bank, something that both the White House and the Arab world see as an impediment to a two-state solution.

Arab diplomats said they would be watching closely to see what next steps the White House would take. They said they want to see if President Obama tones down his rhetoric toward Israel or keeps the promise he made during his Cairo address earlier this month to ensure Israelis adhered to their own set of responsibilities to achieve peace.

"Clearly now the ball is in Washington's court. We will now see if [the Obama administration] is serious about being even-handed or not," one diplomat said.

Mr. Netanyahu demanded on Sunday that the Palestinians accept Israel as a Jewish nation as a precondition to statehood, a stance that would mean their caving in on a core tenant of negotiations until this point: the right of return for Palestinian refugees made homeless and stateless during Israel's war of independence.

The statement drew outrage from Israel's closest Arab ally, Egypt. Mr. Mubarak, who prides itself as a mediator in Palestinian issues and a close U.S. ally, said he had urged Mr. Netanyahu in his anticipated speech on Sunday to accept picking up peace talks where they had broken off instead of changing the parameters to achieve peace. That would have sent a message that the Israelis were serious about solving the two-decade-long standoff regarding the establishment of a Palestinian state, Arab diplomats said.

The bedrock of peace talks has been that Israeli withdrawals from territory it gained in the 1967 Arab-israeli War in exchange for peace while the two sides negotiate a solution to issues like refugees, Jerusalem and settlements.

The uproar from even the countries with close relations with Israel underscores how divisive the issues dividing the Palestinians and Israelis are -- as well as how important tone and perception of good will is to kick start a new peace push.

WSJ