The United States rarely uses 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.
