PARIS, Dec 6 (Reuters) - A deal on Palestinian statehood by the end of next year is realistic but a fully functioning state will take longer, Middle East envoy Tony Blair said in an interview on Thursday.

Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas agreed in Annapolis, Maryland last week to try to reach a peace treaty creating a Palestinian state by the end of 2008, although doubts remain over the plan's viability.

"I think a negotiated settlement is possible in 2008," Blair told France 24 television. But he added: "It will take some time for that negotiated settlement to be put in place fully." Political negotiations could be concluded next year but work had to be done to transform the Palestinian areas from territories into a working state, he said.

"Facts on the ground" were also needed to ensure "what actually happens in the daily lives of Palestinians and Israelis (is) consistent with political talks and a Palestinian state," he added.

Blair acknowledged there had been scepticism about whether an agreement could be reached before U.S. President George W. Bush leaves office after U.S. presidential elections next year. "I spoke with him in the White House not very long ago and I am sure he is completely and personally determined to make it happen," Blair said. "You can debate about how much America put into this a few years ago but, today, President Bush and Secretary of State Condoleezza Rice are absolutely up for it."

Many observers think the 2008 goal is too ambitious, given Abbas and Olmert are both weak politically, and big differences remain between the two sides on key issues.

The peace process hit its first snag in the week following the peace conference as Palestinian leaders accused Israel of trying to torpedo negotiations with a plan to build new homes on land it seized in the Jerusalem area 40 years ago. (Reporting by Jon Boyle; Editing by Michael Winfrey)

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