Speaking at an annual academic conference, Sharon's speech Thursday evening was conciliatory and optimistic, a sign of the changing atmosphere in the post-Yasser Arafat era.

In step with those changes, Sharon indicated for the first time in public that he wanted to coordinate his "disengagement plan" with the Palestinians, an about-face from his initial proposal to "unilaterally" pull out of all of the Gaza Strip and four West Bank settlements next year.

"In light of the new opportunities and potential of a new Palestinian leadership, Israel will be prepared to coordinate various elements relating to our disengagement plan with the future Palestinian government - a government which is ready and able to take responsibility for the areas which we leave," Sharon said.

Despite the kind words, violence raged in Gaza on Friday.

After 11 Israeli soldiers were slightly wounded in a Palestinian mortar attack, Israel sent tanks and bulldozers into the Khan Younis refugee camp early Friday to knock down buildings used as cover by militants, the military said.

Two Palestinians, one a gunman, were killed and eight people were wounded in the fighting.

Hundreds of Palestinians fled their homes for fear the army would demolish them. The families sought refuge in a nearby hospital, a stadium and at the homes of relatives who don't live on the front-line of fighting.

A few hours earlier, an Israeli helicopter fired a missile at a carpentry shop in the Rafah camp, which the army said was used to manufacture mortars.

Charging that Arafat was the main obstacle to peace, Sharon called 2005 "the year of the great opportunity."

Israel shunned Arafat and confined him to his West Bank headquarters for nearly three years before he died Nov. 11 in a French hospital. Since then, Israel has been signaling that it will work with his replacement, likely to be Mahmoud Abbas, the front-runner in a Jan. 9 presidential election.

Now, Sharon said, "We stand before a unique window of opportunity. Who knows when we will have this opportunity in the future. We must not miss this opportunity to reach an agreement."

Sharon said his planned withdrawal from Gaza and a part of the West Bank could lead to peace negotiations. Acknowledging that the pullout proposal has caused him political difficulties, forcing him to reform his government, he defended his plan.

"To do this, we have to take the initiative," he said. "This is the hour, this is the time, this is the national test."

If the Palestinians stop militant groups from attacking Israel, he said, the result could be fulfillment of their desire for a state.

Political movement is conditional on "real action by them against terrorism, liquidating it and bring it to elimination," as well as internal reforms and an end to anti-Israel incitement, Sharon said.

"For their part, the Palestinians can then also live in dignity and freedom in an independent state and together with us enjoy good neighborly relations while cooperating for the good of both our peoples," he said.

Palestinian reaction to the speech was dismissive.

Palestinian Cabinet minister Saeb Erekat, who is in charge of negotiations with Israel, said the speech contained nothing new. "If he wants to withdraw from Gaza or anywhere else, no one will stop him. But as far as permanent settlement issues, this is dictation," he said. "We need negotiation, not dictation."

Hamas spokesman Sami Abu Zuhri said Sharon's speech was "a declaration of war against the Palestinian people and the rights of the Palestinian people," adding, "our answer will be that we will move ahead in our resistance against the occupation."

Hamas has been responsible for dozens of suicide bombings that have killed hundreds of Israelis during four years of violence.

Addressing the Palestinians, Sharon said, "We have no desire to rule over you. We have no desire to run control your affairs," endorsing their desire for an independent state while demanding that they stop attacks against Israel.

Sharon said that Israel's pullout from Gaza would ease demographic pressures on the country. About 8,200 Israeli settlers live among more than 1 million Palestinians in Gaza.

"It is clear that in a permanent peace accord, we will not be in Gaza," he said.

Sharon said that the Palestinians must "eliminate terrorism" as a condition for progress toward a peace settlement with Gaza. He repeated his pledge to cooperate with the Palestinians to allow free elections to replace Arafat.

Sharon praised Egypt for its intention to cooperate with the Israeli pullout from Gaza. He said if Egypt makes a concerted effort to stop Palestinian arms smuggling from Egypt into Gaza through tunnels under the border, Israel would withdraw from the patrol road - a key flashpoint in the conflict.