Mr. Bush said, "I commend Prime Minister Sharon for his bold and courageous decision to withdraw from Gaza and parts of the West Bank. I call on the Palestinians and their Arab neighbors to match that boldness and that courage."
Sharon's plan calls for the complete withdrawal of Israeli settlements from Gaza but would retain some Jewish settlements in the West Bank, which the Israeli leader portrayed as an effort to create defensible borders for Israel.
At a joint White House press conference with Sharon, Mr. Bush said Israel has the right to keep some West Bank land that Palestinians claim their own, marking a significant shift in U.S. policy that could affect Middle East peace negotiations.
Mr. Bush called it "unrealistic" to expect that Israel, in any final peace deal with the Palestinians, would make "a full and complete return to the armistice lines of 1949" --significant because Israel seized the West Bank, Gaza and East Jerusalem in the 1967 war.
President Bush cited new demographic realities in the region, including the emergence of major Israeli population centers in the West Bank, for the apparent change in U.S. policy.
Reiterating U.S. commitment to Israel's security, the president said Sharon's proposal would strengthen "Israel's self-defense capability, including its right to defend itself against terror."
Asked directly if the United States recognized Israel's right to keep some settlements in the West Bank, President Bush responded that Sharon had begun the process of dismantling settlements from the West Bank. He said final decisions about Israeli settlements in the West Bank had to wait for "final status" negotiations between the Israelis and Palestinians on a Palestinian state.
Sharon said his disengagement plan reduces friction between Israelis and Palestinians and would improve Israel's security and economy. It will create a "new and better reality" for Israel, Sharon said, and set the right conditions for negotiations with the Palestinians.
President Bush maintained Sharon's disengagement plan represented a "hopeful" step forward in the creation of a Palestinian state, as part of the U.S.-backed "road map" for peace.
On another sensitive issue, Mr. Bush endorsed Sharon's recommendation that Palestinian refugees, as part of any final peace deal, should be settled in a Palestinian state, not Israel. President Bush said a solution to the refugees' plight would be found "through the establishment of a Palestinian state and the settling of Palestinian refugees there rather than in Israel."
This announcement represents a setback to Palestinian leaders, who support the right of return to Israel of Palestinians who claim their families were exiled during Israel's founding in 1947-48.
Even before the joint news conference, Palestinian officials signaled strong disapproval for Sharon's plan, since Palestinians view Israel's settlements in the West Bank, Gaza and part of Jerusalem as an illegal encroachment on land they want for a future state.
Palestinian leader Yasser Arafat warned the peace process would be derailed if the United States assured Israel it can keep some West Bank settlement blocs and ruled out the return of Palestinian refugees.
"The Palestinian leadership warns of the dangers of reaching such an accord, because it means clearly the complete end of the peace process," according to a statement issued by Arafat's office early Wednesday.
Later Wednesday, Palestinian Prime Minister Ahmed Qurei rejected President Bush's statements implying that Israel would be allowed to keep some West Bank settlements in a peace agreement.
"He is the first president who has legitimized the settlements in the Palestinian territories when he said that there will be no return to the borders of 1967," he said. "We as Palestinians reject that, we cannot accept that, we reject it and we refuse it."
Palestinian cabinet minister Saeb Erekat also dismissed President Bush's announcement. "This is like someone giving a part of Texas' land to China," he told the Associated Press.
Palestinian Foreign Minister Nabil Shaath is expected to arrive in Washington next week for talks with Secretary of State Colin Powell and national security adviser Condoleezza Rice.