US President George W. Bush on Thursday called for a compensation fund for Palestinian refugees as he set out what he said was the “point of departure” for negotiations on a peace agreement between Israel and the Palestinians this year.

At the end of two days of meetings in Jerusalem and the West Bank, Mr Bush sought to highlight his sympathy with the Palestinians more than on previous occasions and to dispel scepticism over the US’s readiness to lean on Israel.

“There should be an end to the [Israeli] occupation that began in 1967,” he said. “The agreement must establish Palestine as a homeland for the Palestinian people, just as Israel is a homeland for the Jewish people.”

In comments the White House said reflected conversations with both sides over the past month, Mr Bush suggested the world needed to consider “new international mechanisms, including compensation, to resolve the refugee issue”.

Privately, many of the parties in the conflict say it will be impossible for all of the millions of Palestinian refugees to return to their original homes and that a multi-billion compensation fund will have to be set up.

Mr Bush said the Palestinians would need “the help of Israel, the region and the international community” to improve their economy and security arrangements.

Earlier, he travelled to Ramallah on the West Bank, where he warned Israel not to undermine Palestinian security forces.

“To the extent that Israeli actions have undermined the effectiveness of the Palestinian force, or the authority of the state relative to the average citizen, [that] is something that we don’t agree with and have made our position clear,” Mr Bush said at a joint press conference with Mahmoud Abbas, Palestinian Authority president.

The Israeli armed forces make frequent incursions into the West Bank to arrest suspected militants, arguing that the forces loyal to Mr Abbas have neither the ability nor the readiness to fight terrorism. But Palestinian leaders say such moves make it impossible to build up their own forces to take on the militants.

Mr Bush said he planned to “nudge” both sides to meet their commitments, in parallel with their efforts to reach a peace deal this year.

Under the first round of commitments – not met since the “road map for peace” was published by the US in 2003 – the Palestinians are obliged to take steps to end violence and restrain extremist groups, while Israel must dismantle illegal settlement outposts and freeze settlement activity.

At the Annapolis conference last year, the US agreed to take on the role of “monitoring” both sides’ progress on meeting their commitments. Thursday, the White House said Lieutenant General William Fraser, assistant to the joint chiefs of staff, had been appointed to help with monitoring.