U.S. Secretary of State Condoleezza Rice, in Jerusalem for talks with Israeli and Palestinian leaders, says the advance of democracy and growing opposition to terrorism is making Middle East peace a realistic hope. In a policy address late Sunday, she urged the Palestinian Authority to dismantle terrorist groups and Israel to allow freedom of movement for Palestinians.

Ms. Rice came to the Middle East at a grim moment, with Jordan reeling from last week's terrorist attacks in Amman and efforts to negotiate an international gateway between Gaza and Egypt stalled.

But in a policy speech to Israeli and American dignitaries sponsored by the U.S. -based Mideast policy group, the Saban Center, Ms. Rice said the region may be at a historic threshold, propelled by the trend toward democratic reform in the Muslim world and a growing rejection of the use of terror as a political tactic, as seen in the response to last Wednesday's Jordanian hotel attacks:

"Fortunately now, leaders and clerics and private citizens are stepping forward, and taking to the streets, and calling this evil by its name," Ms. Rice said. "This is a profound change, and there are others. We have hope for peace today because people no longer accept that despotism is the eternal political condition of the Middle East."

Ms. Rice, due to meet separately with top Israeli and Palestinian leaders Monday, said the possibility of peace now "is both hopeful and realistic, provided that Israel takes no actions that prejudge a final settlement and works to improve the daily lives of the Palestinians. The Palestinians in turn, she said should advance democratic reform and fight terrorism and lawless violence:

"Greater freedom of movement is a key for Palestinians, from shopkeepers to farmers to restaurant owners and for all seeking early, easier access to their economic livelihood," Ms. Rice said. "And let us be very clear about one other matter. Dismantling the infrastructure of terrorism is essential for peace, because in the final analysis, no democratic government can tolerate armed parties with one foot in the realm of politics, and one foot in the camp of terrorism."

Ms. Rice paid tribute to Israeli Prime Minister Ariel Sharon for his courage and leadership in carrying out the Israeli disengagement from Gaza and parts of the West Bank.

The Israeli leader preceded Ms. Rice to the podium with a toughly worded speech, saying that Israel has proven the seriousness of its intentions for peace with "painful compromises" that must be matched by the Palestinian Authority.

Heard through an interpreter, Mr. Sharon said the administration of Palestinian leader Mahmoud Abbas is at a crossroads, and must decide if it chooses a path of peace, or one of radical terror, that allows groups like Hamas to take part in the political process before they disarm.

"Advancing to the second phase of the road map will be done only after the Palestinian authority implements the first phase of the plan, by dismantling the terrorist organizations and implementing the comprehensive reforms to which they are committed. We cannot accept a situation in which terrorist organizations do not disarm, yet gain legitimacy for their existence under the cloak of democracy."

Mr. Sharon said he was hopeful of agreements within the next few days on unresolved issues from the disengagement plan.

James Wolfensohn, envoy of the international Middle East "quartet," has been working for weeks for an agreement to open a crossing point for Palestinian travelers and goods at Rafah between Gaza and Egypt.

Mr. Wolfensohn warned Sunday that time is running out for Israel and the Palestinians to complete an agreement on Gaza border crossings and said it would be a tragedy if a deal is not reached soon.