(Removes reference in paragraph 2 to United States rarely using word)

By Jeffrey Heller and Matt Spetalnick

JERUSALEM, Jan 10 (Reuters) - U.S. President George W. Bush, hardening his tone towards Israel on Thursday, urged an end to "the occupation" of the West Bank and pushed for a peace treaty to be signed within a year to create a Palestinian state.

Bush does not always use the politically charged word "occupation" to describe Israel's hold on lands captured in a 1967 war. It is a term Palestinians seeking a state in the West Bank and Gaza Strip employ frequently to describe their plight.

"The establishment of the state of Palestine is long overdue. The Palestinian people deserve it," Bush said in a statement he read to reporters in a Jerusalem hotel.

Bush's language, after he travelled to the West Bank city of Ramallah past Israeli checkpoints and settlements, could cause political pain to Israeli Prime Minister Ehud Olmert, whose right-wing coalition partners usually bridle at such remarks.

"There should be an end to the occupation that began in 1967," Bush said. He had earlier met Palestinian President Mahmoud Abbas and visited Bethlehem, also in the West Bank.

Bush pressed the Palestinians to rein in militants. He said any negotiations must also ensure Israel has "secure, recognised and defensible borders" alongside a "viable, contiguous, sovereign and independent" Palestine.

Challenging sceptics of his new push for peace on the first U.S. presidential visit to Ramallah, he told a news conference with Abbas: "I believe it's going to happen, that there will be a signed peace treaty by the time I leave office."

An Israeli official said Bush's remarks were the basis for moving forward with negotiations.

"We accept them. We see them as consistent with understandings with the Americans and as a positive foundation for moving forward," said the official, speaking on condition of anonymity.

Critics say Bush, who steps down in January 2009, has failed to deploy Washington's full weight in seeking to end the 60-year-old conflict during his first seven years in office.

A summit he hosted at Annapolis in November ended a hiatus in negotiations since 2000.

But many doubt differences can be overcome now, as Bush seeks to burnish his legacy in the Middle East after five years of war in Iraq. Olmert is politically weak and Abbas cannot control the Gaza Strip, which Hamas Islamists seized in June.

At a working dinner in Jerusalem, Bush told coalition leaders that Olmert was a strong leader who they should keep in power, Israeli officials said.

Some right-wing ministers have threatened to quit Olmert's government should he make any sweeping peace concessions.

COMPROMISE

Bush reiterated in the keynote statement a vision of territorial compromise he first charted in a policy letter to then Israeli Prime Minister Ariel Sharon in 2004, advocating mutually agreed changes in armistice lines set in 1949 after fighting with Arab armies that accompanied Israel's foundation.

Bush said he had urged Abbas and Olmert, whom he met on Wednesday and again on Thursday, "to make sure their teams negotiate seriously, starting right now".

His use of the term "peace treaty" was seen by some as an indication he was not ready to settle for a vaguer "framework agreement" which Israeli and Palestinian officials have said Olmert thinks is all that is feasible before Bush steps down.

Bush also reaffirmed a U.S. commitment to a 2003 peace "road map" under which Israel was to halt settlement activity and Palestinians were to crack down on militants.

"On the Israeli side, that includes ending settlement expansion and removing unauthorised outposts. On the Palestinian side that includes confronting terrorists and dismantling terrorist infrastructure," the president said.

"Security is fundamental. No agreement and no Palestinian state will be born of terror. I reaffirm America's steadfast commitment to Israel's security."

The White House announced Bush had appointed U.S. Lieutenant-General William Fraser to monitor steps both sides are supposed to take under the road map as part of a peace process revived at the international summit in Annapolis.

Preparing to head to the Gulf on Friday, Bush urged Arab states to "reach out" to Israel. On a trip to rally Arab support against non-Arab Iran, tougher language towards Israel may also stand Bush in good stead when he continues his tour.

Speaking earlier at the Muqata compound where the late Palestinian leader Yasser Arafat was besieged by Israeli forces just a few years ago, Abbas hailed Bush as the first U.S. president to commit fully to back a Palestinian state.

After the meeting, Bush flew by helicopter to the West Bank city of Bethlehem to visit the Church of the Nativity, built over the traditional birthplace of Jesus.

There the president, a devout Christian, spoke of his hope for a divine gift of freedom for all people and an end to the Israeli walls and checkpoints that ring the Palestinian town. (Writing by Jeffrey Heller and Alastair Macdonald, Additional reporting by Tabassum Zakaria, Ari Rabinovitch and Adam Entous in Jerusalem, Editing by Robert Woodward)

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