An elated Israeli Prime Minister Ariel Sharon said his plan to pull back from parts of the West Bank and Gaza, hailed by Bush, would create "a new and better reality for the state of Israel."
But Palestinian Prime Minister Ahmed Qureia - with whom the Bush administration deals while boycotting leader Yasser Arafat - called Bush "the first president who has legitimized the (Israeli) settlements in Palestinian territories."
"We as Palestinians reject that," Qureia said. "We cannot accept that. We reject it and we refuse it."
Arafat earlier called the idea "the complete end of the peace process." And Palestinian Cabinet minister Saeb Erekat said of Bush's statement: "This is like someone giving a part of Texas' land to China."
"If Israel wants to make peace, it must talk to the Palestinian leadership," Erekat said.
Palestinian leaders had previously said they had been assured by the Bush administration they would be consulted before any endorsement of Sharon's plan.
Bush's statement on settlements "will be read by the Arab world as justification of Sharon's sovereignty over major (settlement) blocs," Edward S. Walker, a former U.S. ambassador to Israel and to Egypt, said in an interview.
Previous U.S. administrations have described Jewish settlements as obstacles to peace. One of Bush's predecessors, Jimmy Carter, went even further and called them illegal.
A senior Israeli official, speaking on condition of anonymity, said Sharon thought that no American president had ever made concessions so important to Israel as Bush did on Wednesday.
Sharon, in gaining Bush's backing of his unilateral plan to withdraw all Jewish settlers and military installations from Gaza and from some areas of the West Bank, offered several concessions in a letter to Bush.
The Israeli leader said he would limit the growth of Jewish settlements and remove all unauthorized outposts on the West Bank. And Sharon said a security fence Israel is building to deter Palestinian attacks was "temporary rather than permanent."
Also, Sharon renewed his commitment to the so-called road map for peacemaking backed by the United States but said the Palestinian Authority had failed to stop terror and to reform its security service.
Bush called Sharon's plan historic and urged Palestinians to match Israel's "boldness and courage."
In his break with long-standing U.S. policy, Bush said it was unrealistic to expect Israel to disband all large Jewish settlements in the West Bank - or to return to the borders it held before capturing the territory in the 1967 Mideast war - in any final peace deal.
Behind the scenes, Bush administration officials tried to cast the day's events as Bush gaining concessions from Sharon. A senior U.S. official, speaking on condition of anonymity, said the Palestinians' statements were viewed as simply reflecting anxiety that would be eased once they read Bush's and Sharon's statements on the issue, released separately.
But Bush, in a news conference with Sharon at his side, gave a key concession the Israeli leader had sought, saying there were "new realities" on the West Bank since Israel captured the land along with Gaza and east Jerusalem in the 1967 war.
Past U.S. presidents have operated on the assumption there could be some changes in Israel's borders. But Bush went much further.
He committed himself to Israel's retention of parts of the West Bank settlements in a letter to Sharon in which he said that approach was necessary for Israel's security - an approach long taken by the former general.
In another major concession sought by Sharon, Bush said a final peace deal should provide for Palestinian refugees to be resettled in a Palestinian state, not in Israel.
Palestinian leaders have argued that tens of thousands of Palestinians are from families evicted by Israel upon creation of the Jewish state in 1947-48 and have a right to return to Israel. Arafat rejected a peace proposal by former President Clinton that would have turned over virtually all of the West Bank to the Palestinians because it did not include that right.
Bush said the "realities on the ground and in the region have changed greatly" since 1967 and should be reflected in any final peace deal.
He again held out the prospect of Palestinian statehood. But Palestinians, wanting all of the West Bank and Gaza and part of Jerusalem for a state, fear that Sharon is sacrificing Gaza and parts of the West Bank as a prelude to keeping other disputed areas.
Sharon, smiling broadly during the news conference with Bush, said he was encouraged by the president's support for his plan, which the Israeli leader had sought as a way to win support within his own Likud political party at home.
Asked outright if the United States recognized Israel's right to keep some settlements in the West Bank, Bush said Sharon had started the process of removing settlements and conclusive decisions had to wait for "final status" negotiations between the Israelis and Palestinians on a Palestinian state.