Israeli Defense Minister Ehud Barak said Sunday he saw a chance to advance peace talks with Palestinians and that a policy speech by Israel's premier, dismissed by Egypt as flawed, was a major step forward.

Israeli Prime Minister Benjamin Netanyahu endorsed -- with tough conditions -- the establishment of a demilitarized Palestinian state in a policy speech a week ago, but Cairo said the proposal fell short of the Palestinian state Arabs seek.

"He made it clear that the end result, the goal of the whole process is to have a situation where the two peoples, Palestinian and Israeli, are living side by side in two states in good neighborliness, peace and security," Barak told a news conference after meeting Egyptian President Hosni Mubarak.

"It is a really unique opportunity for the peace process because the common interest is so apparent regarding the struggle against hegemonic Iran, against radical terrorism, against proliferation of nuclear weapons," he said.

Barak described Netanyahu's comments on a Palestinian state as a "major step forward" by Israel in helping advance peace.

Netanyahu, speaking on June 14, said Palestinians must recognize Israel as a Jewish state and forego the right of return for refugees but did not promise a halt to Jewish settlement expansion in the occupied West Bank.

Mubarak has said Israel's call to recognize Israel as a state for the Jewish people undermined efforts to achieve peace and has said he told Netanyahu, who visited Egypt last month, that peace talks should resume where they left off.

Palestinian leaders have refused to recognize Israel as a Jewish state because they believe it weakens the position of the 20 percent of Israel's citizens who are Arabs.

They also say it undermines a key demand for a right for Palestinians to return to areas in Israel from which they fled or were forced out in the 1948 war ahead of Israel's creation.

An Israeli official said Barak's visit aimed to look at ways to move ahead in peace talks after Netanyahu's speech and an address by U.S. President Barack Obama from Cairo on June 4 that covered Middle East peace and other topics.

Obama, who has promised a deep U.S. role in Middle East peace efforts, has called for a full Israeli settlement freeze but said he saw "positive movement" in Netanyahu's speech.

"The fact that it (Netanyahu's speech) was well accepted by the White House ... means that the Americans are reading it the same way," Barak said. "It is still clear that there are certain differences in how to implement certain practical aspects of it but I think that in the coming weeks we will try to iron it out and pave the way for moving forward."

Like Egypt, Palestinian officials have voiced opposition to many aspects of Netanyahu's proposal.

Arab foreign ministers meet in Cairo Wednesday to discuss Obama's address and Netanyahu's proposal, state news agency MENA reported.

(Additional reporting by Edmund Blair in Cairo and Dan Williams in Jerusalem; Editing by Louise Ireland and Lin Noueihed)