Addressing an audience alongside Israeli Defence Minister Ehud Barak, Salam Fayyad said rolling back should start by ending army incursions in the West Bank, where the Palestinians aim to establish their state, along with Gaza.

"Unfortunately those incursions continue," Fayyad told the Herzliya Conference, which annually attracts prominent figures in the Israeli political and diplomatic establishment.

Halting the practice and handing over more security responsibilities to the Palestinians on their land would show that the Israeli occupation is being "rolled back on its way to ending," Fayyad said.

After over 16 years of "peace process" that has yielded little, Palestinians needed to see convincing, concrete signs that new talks would lead to where they want to go.

With peace talks frozen for more than a year, Fayyad's attendance was the highest-level public encounter between a Palestinian and Israeli official since September, when Palestinian President Mahmoud Abbas met Israeli Prime Minister Benjamin Netanyahu in New York under U.S. auspices.

That meeting failed to break the impasse between them and U.S. efforts to broker a resumption of peace talks have yet to yield a breakthrough and a resumption of negotiations.

READY FOR STATEHOOD

Palestinian policy toward the peace process rests ultimately with Abbas, head of the Fatah party and the Palestine Liberation Organisation. Fayyad's attendance of the conference had been criticized in private by some senior Fatah figures.

Fayyad echoed Abbas's opposition to any more peace talks without a full halt to Israeli settlement building in the West Bank, occupied since 1967. Without such a freeze, the Palestinians would doubt the value of more talks, he said.

He said he would build the key institutions of a Palestinian state by the middle of 2011, telling critics: "Yes, it is unilateral ... because only the Palestinians can do it."

By 2001 "we will have amassed a critical mass of positive change on the ground, consistent with the emergence of that Palestinian state," he said. "This is not about declaring a state, it is about getting ready for one," he said.

If the peace process launched in 1993 had not still ended the occupation by then, the existence of functioning Palestinian state institutions would convince the world that the only thing standing in its way was the occupation, he said.

Acknowledging that the Palestinian Authority currently has no control over the Gaza Strip, which is ruled by the Islamist Hamas movement, Fayyad said that breach had to be healed.

He also appealed to Israel to lift its "wrong and wrong-headed" blockade of the enclave.

Barak, leader of the Labour Party and a former prime minister, praised what he called Fayyad's "practical and concrete" thinking. "Important things are happening," he said, highlighting reform of the Palestinian security forces in the West Bank as an area of progress.

"Israel has a clear silent majority in favor of peace," Barak said, and it does not want "apartheid" rule over the Palestinians. It must "set borders for the land of Israel that would comprise a massive and solid Jewish majority for generations" with a Palestinian state as its neighbor.

"We have a supreme responsibility ... to advance in the diplomatic process. The alternatives are much worse," he said.

(Additional reporting by Douglas Hamilton and Allyn Fisher-Ilan; Editing by Charles Dick)