Palestinian Authority Prime Minister Salam Fayyad said Monday that Palestinians can make a stronger case for ending Israel's occupation by building up self-governing institutions that would strengthen global support for a Palestinian state. He set a goal of establishing an independent state within two years.

"I call upon our people to unite around the project of establishing a state and to strengthening its institutions . . . so that the Palestinian state becomes, by the end of next year or within two years at most, a reality," he said in a speech to a university audience.

Fayyad's remarks were billed as a response to Israeli Prime Minister Benjamin Netanyahu's recent speech that accepted the eventual creation of a Palestinian state, but demanded sharp limits to its sovereignty and territory. Yet much of Fayyad's address was directed at his own people -- a self-critical approach rare for Palestinian leaders, who usually put the onus on Israel to make concessions to advance toward peace.

Instead, he urged Palestinians to act more decisively to shape viable self-governing institutions. If they create sound law enforcement agencies, courts, schools and public services, he said, "the entire world will realize that it is time to end the occupation and allow our people to live free in their homeland.

"I call on our people to rally behind this goal and roll up their sleeves in order to achieve it."

But the Palestinian leader also took Netanyahu to task for the conditions laid out in his June 14 speech in which, under American pressure, he reversed his previous opposition to a two-state solution to the Israeli-Palestinian conflict.

Fayyad rejected Netanyahu's insistence that Jerusalem remain the undivided capital of Israel. Speaking at Al Quds University in Abu Dis, a West Bank suburb that is separated from Jerusalem by a concrete Israeli barrier, he said Palestinians would never renounce their claim to the eastern part of the city as "the eternal capital of our independent state."

And he criticized the Israeli leader for refusing to halt the growth of Jewish settlements on West Bank land the Palestinians want for their state.

"How can our people regain their faith in a peace process that aims to end the occupation if it does not put a total halt to settlement activity in all its forms?" he said.

Western officials credit Fayyad, a Texas-trained economist, with improving the Palestinian Authority's effectiveness in the West Bank since being appointed to the post two years ago. He has modernized government ministries and overseen the deployment of Western-trained security forces to fight crime and armed militants in the territory's cities, though he said Monday that much work remains to be done.

His government does not control the Gaza Strip, which has been ruled by Hamas since a violent split in the Palestinian movement in June 2007. In his speech, Fayyad reached out to Hamas, saying "ending the occupation and building the state requires ending the split."

Egypt is mediating reconciliation talks between Palestinian Authority President Mahmoud Abbas' Fatah movement and Hamas, a militant Islamic group that rejects the idea of a permanent peace with Israel. Fayyad is loathed by Hamas, which calls his security campaign a collaboration with Israel, and would probably be replaced if the talks succeed.