Tony Blair held out a distant prospect of peace in the Middle East yesterday as he met the Israeli and Palestinian presidents, but he gave no promises that anything would come of his new role as the international community’s intermediary.

“I think that, even from the conversations I’ve had, there is a sense of possibility,” Mr Blair said after his meeting with Shimon Peres, the 83-year-old Israeli President. “But whether that sense of possibility can be translated into something — that is something that needs to be worked at and thought about over time.”

While Israel insists that Mr Blair must stick to his allotted role in rebuilding Palestinian infrastructure, rather than handling peace talks, Mr Peres said that a new economic initiative with the Palestinian Authority could play a vital role. “I believe the economy should be given a greater role in peacemaking,” he said, praising Mr Blair’s “experience and personality, his willingness to do things”.

Palestinian leaders disagree and want Mr Blair to be given a mandate that includes steering Israel back to final-status talks on the peace process. “When people start speaking about the mandate of economics, institution-building and isolating it from the political end, one wonders, how can this happen?” Saeb Erakat, the chief Palestinian negotiator, said, after Mr Blair met Mahmoud Abbas, the Palestinian President, in Ramallah.

“How can we be seriously speaking about economic development and governance and institution-building while the settlements, the wall, the denial of movement, the obstacles, the roadblocks, are eating up the whole idea of a Palestinian state?”

On the streets of Ramallah, Palestinian shopkeepers were depressed about the state of their economy, shattered by an international embargo that was imposed when Hamas, the Islamist movement, won elections 18 months ago. Few held out hope that Mr Blair’s visit would help. “The economy here is very bad,” Khaled, 27, who owns two shops that sell sports shirts in the city centre, said. “The employees of the Palestinian Authority are not getting paid, and that reflects on business all along the street.”

The first visit by Mr Blair — who will return in September for further talks before drafting a report outlining how he plans to proceed — has ignited a flurry of diplomatic initiatives. As he leaves today, the foreign ministers from Jordan and Egypt are due to arrive to present a proposal by the Arab League offering Israel recognition from the Arab world if it withdraws to the 1967 armistice line, allows a Palestinian state and, most controversially, permits the return of millions of Palestinian refugees from neighbouring countries.

Israel has peace treaties with Jordan and Egypt, but Ahmed Aboul Gheit, the Egyptian Foreign Minister, held out the tantalising promise yesterday that more Arab League countries might join an expanded working committee that is discussing the issue. That could bring Israel into diplomatic contact for the first time with Arab states which have shunned it since its creation in 1948.

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