David Cameron has called for an end to Israeli checkpoints in the West Bank and pledged his commitment to the creation of a Palestinian state.
Meeting Palestinian Authority president Mahmoud Abbas in Bethlehem, Mr Cameron outlined his vision of a new Palestine.
He pledged to work towards "a Palestine without checkpoints, where you can travel freely in your own country and beyond, where you can visit your friends and family wherever they may be, and the West Bank and Gaza are together again.
"A world in which you have your dignity and your freedom at last and security for the Palestinian people too. It won’t be easy but this is a vision that we stand absolutely committed to helping you to realise."
Mr Cameron focussed on three issues at the press conference: the peace process, the "opportunities peace can bring", and the "difficult path to peace".
He said Britain would help the Palestinians to "build strong institutions and a strong economy" and announced £6 million of funding to help 100 Palestinian businesses and to restore farming land in Area C.
Mr Cameron added: "Our position is clear and has not changed; we want to see a two-state solution.
"A sovereign, viable and independent Palestinian state, based on 1967 borders, with mutually agreed land swaps, alongside a secure Israel.
"And Jerusalem, a sacred city to three great world religions, must be the shared capital for both sides, with Gaza a fundamental part of the Palestinian state.
"We must not let those who seek to undermine the process, by firing rockets from Gaza, succeed."
The Prime Minister announced that the British Council would reopen its English language centre in East Jerusalem after more than a decade.
"We want to see more institutions reopen in Jerusalem and the protection of Palestinian, life, culture and heritage in this unique city," he added.
Mr Abbas also voiced his opposition to the boycott of Israel, but said products from Israeli settlements in the West Bank should be boycotted.
"We never called for boycotting the state of Israel, because we deal with the state of Israel," he said.
"Rather, we boycott and call for boycotting to what’s going on in the settlements, because settlement – all the world recognises that it is illegal, and so it is – its products should be boycotted."
Mr Cameron said peace was not "definite or even probable", but that it was "possible".
Mr Abbas told Mr Cameron: "Your Excellency, once again, we stress our commitment to consolidate our cooperation, mutual cooperation, and our appreciation for the United Kingdom, Queen, nation and government, for all the support you provide for our people, at all levels.
"And we are satisfied as we see this relationship grow and consolidate in all areas. Thank you for your visit, your precious visit to Palestine, and I welcome you again on this Holy Land, as a guest, a friend – a dear guest for Palestine, from a dear nation and dear country that we respect."
Earlier on Thursday Mr Cameron spoke to Palestinian teenagers living in Gaza via a live internet link-up. They discussed how Britain could help them find work.
More than 60 rockets were fired from the territory into Israel by Palestinian terrorists on Wednesday.