In an interview with the daily Haaretz, Sharon said that after the "shock" that had run through the region with the U.S. take-over of Baghdad, "there is therefore a chance to reach an agreement faster than people think."

"We face the possibility that a different period will begin here. The move carried out in Iraq generated a shock through the Middle East and it brings with it the prospect of great change," he told the newspaper.

"I think opportunities have currently been created that did not exist before. The Arab world in general and the Palestinians have been shaken, he said.

"One has to view things realistically," said the 75-year-old former general, in his first major interview since the Iraq war began.

In the interview, however, Sharon sounded like his left-wing Labor rivals in saying that a continued Israeli military “grip” on Palestinian areas was untenable morally and economically.

" Eventually there will be a Palestinian state … I don't think we have to rule over another people and run their lives. I do not think we have the strength for that. It is a very heavy burden on the public and raises ethical problems and heavy economic problems," he was quoted as saying.

The international community says Jewish settlements are illegal under international law. Israel has disputed this and kept building settlements even after the interim peace deals.

Sharon refused to give details of whether he was planning to evacuate specific Jewish settlements in the occupied territories, but reiterated that he was ready to make "painful concessions."

"We are talking about the cradle of Jewish civilization. Our whole history is bound up with these places. Bethlehem, Shiloh and Beit El," he said, referring to the reoccupied Palestinian self-rule town south of occupied Jerusalem and two West Bank settlements.

"And I know we will have to ‘part with’ some of these places. There will be a parting from places that are connected to the whole course of our history. As a Jew, this agonizes me," he said.

Sharon has long been a champion of the settlement movement, but earned the wrath of Jewish settlers in the Sinai when he oversaw the uprooting of fledgling communities there after the signing of a peace accord with Egypt in 1979, Agence France-Presse (AFP) reported.

Bethlehem was reoccupied by Israel last June along with six other Palestinian West Bank cities. All seven obtained self-rule under interim peace deals in 1993-94 that Sharon opposed while out of power.

Asked if he thinks there is a prospect of reaching a settlement in the foreseeable future, the Israeli prime minister turned elusive.

"That depends first and foremost on the Arabs. It obligates a different type of leadership - a battle against terrorism and a series of reforms. It obligates the absolute cessation of the incitement and the dismantling of all “terrorist” organizations. But if there will be a leadership that understands these things and will carry them out seriously, the possibility of reaching a settlement exists."

And in his latest interview, he stressed a number of conditions, including an end to anti-Israeli attacks by Palestinians, as a precursor to an agreement.

He said he had informed U.S. President George W. Bush that he would make no concessions regarding Israel's security.

"We will be the ones who in the end decide what is dangerous for Israel and what is not dangerous for Israel."

Saeb Erekat, a Palestinian minister close to President Yasser Arafat, said Sharon's remarks seemed to be "public relations tactics" and Palestinians wanted deeds, not words.

Sharon was guarded in praise for moderate new Palestinian prime minister Mahmud Abbas, also known as Abu Mazen, who has called for a suspension of attacks on Israel by Palestinian resistance factions.

"Abu Mazen understands that it is impossible to vanquish Israel by means of terrorism," he said.

But he said he was determined to "to make a real effort to reach a real agreement."

This came as Abu Mazen had presented a first draft of his new cabinet to Palestinian leader Yasser Arafat, who was said to be "not happy" with some of the names.

One official said that former Gaza preventive security chief Colonel Mohammad Dahlan, with whom Arafat had a falling out last year before he left his post, was tipped as heading the internal security forces that would crack down on resistance groups.

A number of Arafat loyalists had been reshuffled but could remain in the cabinet, which was to be presented to Fatah's Central committee later Sunday.

"Arafat will make a big fuss but in the end he will agree," said one official who asked not to be named.

U.S. President George W. Bush has promised to publish a long-delayed international peace "roadmap," setting out the steps to Palestinian statehood, once the new cabinet is formed.

Meanwhile, with the U.S.-led troops almost entirely in control of Iraq, Israeli Defense Minister Shaul Mofaz on Sunday ordered the army to lower its level of high alert against a possible missile attack.

Israeli Defense Minister Shaul Mofaz ordered the army to lower its level of high alert against a possible Iraqi missile attack after the “take-over” of the country by U.S.-led forces, officials said.

The army had been on full alert since just before the beginning of the invasion of Iraq for fear that President Saddam Hussein could fire Scud missiles at Israel in retaliation for the attack, as he did in the 1991 Gulf War.

Mofaz scrapped the alert for the civilian population, telling people to dismantle the plastic coverings used to seal rooms against a possible chemical attack and stop carrying their gas masks when they leave home, the defense ministry said in a statement.

He also ordered thousands of army reservists called up for duty during the war to be demobilized.

But the statement said that Arrow missile batteries, designed to shoot down any incoming Iraqi Scuds, would remain on alert.

In another related development, a Palestinian teenager who was seriously wounded during an Israeli missile attack on Gaza City earlier this week, died of his injuries early on Sunday, Palestinian medical sources said.