(Adds comments by Bush, Olmert)
By Matt Spetalnick and Tabassum Zakaria
JERUSALEM, May 15 U.S. President George W. Bush offered a peace prophecy for the Middle East on Thursday in which the enemies of the United States faced a future of defeat.
"This is a bold vision, and some will say it can never be achieved," Bush told Israel's parliament.
He called U.S. ally Israel, on its 60th anniversary, a "homeland for the chosen people" and made only fleeting mention of Palestinian hopes for statehood.
"Some people suggest that if the United States would just break ties with Israel, all our problems in the Middle East would go away," Bush said.
"This is a tired argument that buys into the propaganda of enemies of peace and America utterly rejects it."
The president is on a Middle East visit that will also take him to Saudi Arabia and Egypt and he said Washington stood by Israel in "firmly opposing" Iran's "nuclear weapons ambitions".
Letting Iran acquire atomic arms, Bush said, "would be an unforgivable betrayal of future generations". Tehran says its nuclear programme is aimed at generating electricity.
Bush's gaze into the future was preceded by a helicopter flight to the biblical past for a tour of the Roman-era desert fortress of Masada, a symbol in Israel of Jewish fighting spirit and self-sacrifice in the face of powerful foes.
"So as we mark 60 years from Israel's founding, let us try to envision the region 60 years from now," said Bush, whose popularity at home has been hurt by an unpopular war in Iraq.
"Israel will be celebrating its 120th anniversary as one of the world's greatest democracies", he said, and "the Palestinian people will have a homeland, a democratic state that is governed by law, respects human rights and rejects terror".
Bush said that "from Cairo to Riyadh to Baghdad and Beirut, people will live in free and independent societies". Iran and Syria "will be peaceful nations, where today's oppression is a distant memory".
Al Qaeda, Lebanon's Hezbollah movement and the Palestinian Islamist group Hamas "will be defeated, as Muslims across the region recognise the emptiness of the terrorists' vision", Bush predicted.
Three Arab legislators held up a sign reading "We shall overcome" and were escorted out of the Knesset chamber as Bush began to speak.
Bush did not repeat his oft-spoken hope of sealing an Israeli-Palestinian peace deal before he leaves the White House in January, a target date that has aroused public scepticism.
Israeli Prime Minister Ehud Olmert, who also addressed parliament, said he was certain a peace agreement "will be approved in the Knesset by a large majority and will be supported by the vast majority of the Israeli public".
Asked about Bush's speech, White House spokeswoman Dana Perino said the president remained "hopeful" a deal could be struck by the time he leaves office.
In Ramallah in the occupied West Bank, pedestrians stood at attention for two minutes to remember the "Nakba", or "catastrophe", when 700,000 Palestinians fled or were forced to leave homes in the fighting around Israel's creation in 1948.
A mournful siren sounded and black balloons were released into the air.
Calling Bush "the leader of evil in the world", Hamas official Sami Abu Zuhri said the group would never grow weak.
At Masada, a cable car carried Bush up the towering plateau where 960 Jewish men, women and children committed suicide rather than surrender to Roman legions crushing a rebellion in ancient Judea, in an act chronicled by a 1st-century historian.
Bush, on a three-day visit to celebrate Israel's founding, and Olmert viewed ruins including a water collection system that sustained besieged Jewish zealots at the sanctuary.
"At this historic site, Israeli soldiers swear an oath: 'Masada shall never fall again.' Citizens of Israel: Masada shall never fall again, and America will be at your side," Bush later told the Knesset, to a standing ovation.
In a television address, Palestinian President Mahmoud Abbas said: "There are two peoples living on this beloved land -- one celebrates independence and the other feels pain of the memory of its Nakba. It's time to end the Nakba of the Palestinian people."
There have been few signs of progress in U.S.-brokered negotiations since promises were made at a peace conference in Annapolis, Maryland, in November.
In the latest setback to a deal with Abbas, Olmert has been urged to resign over suspicions he took bribes from a U.S. businessman. Olmert has denied wrongdoing but pledged to quit if indicted.
Violence around the Hamas-controlled Gaza Strip has also hampered peace efforts. (Writing by Jeffrey Heller, editing by Robert Woodward)