Luxembourg - Israel Prime Minister Banjamin Netanyahuu's acceptance of the two-state solution to the Palestinian conflict is a step in the right direction but does not go far enough, European Union foreign ministers said Monday.

On Sunday Netanyahu gave conditional support to the idea of a Palestinian state for the first time since he took office.

"It's a step in the right direction, but someone referred it as a water melon: 92 per cent water, and in modern water melons you don't even have seeds. We need to get those seeds in there in order to get a solution," Finnish Foreign Minister Alexander Stubb said as he arrived in Luxembourg for talks with EU counterparts.

Netanyahu's speech is a "very important first step, but of course many other steps should follow," the EU's foreign-affairs commissioner, Benita Ferrero-Waldner, said.

While Netanyahu's speech acknowledged the need for a separate Palestinian state and a freeze on settlement-building, he also said that Israel would want concessions in return.

In particular, he demanded that the Palestinians have no army, be denied the power to sign treaties with Israel's enemies such as Syria and Iran, and recognize Israel as the nation state of the Jewish people.

Those conditions are "not what the EU expects," Cypriot Foreign Minister Markos Kyprianou said.

But the EU's top diplomat, Javier Solana, stressed that Netanyahu had "gone further than ever" on settlements, and suggested that "the other things he said in the speech belong ... more to another phase of the negotiations."

A year ago, EU foreign ministers agreed in principle to strengthen their ties with Israel in a so-called "upgrade" on issues such as trade, travel and educational exchanges.

But they quietly sidelined that decision following Israel's December assault on the Gaza Strip.

Stubb said that Netanyahu's speech was not enough on its own to justify implementing the upgrade.

After the foreign ministers' meeting, EU diplomats were set to meet with Israeli Foreign Minister Avigdor Liebermann on Monday evening in Luxembourg.(dpa)