A prestigious Israeli think tank Wednesday endorsed peace negotiations with the PLO and said the possibility should be left open for a Palestinian state after a 10- to 15-year transition period.

The proposal accompanied a 235-page study by Tel Aviv University's Jaffee Center for Strategic Studies on options for dealing with the occupied West Bank and Gaza Strip."Israel can set conditions on its agreement, but it is going to have to talk to the PLO to solve the problem under the present circumstances," said Joseph Alpher, director of the 20-member team that produced the study and a separate paper of recommendations.

The proposal conflicts with the policy of the government, which has ruled out talks with the PLO and rejected any possibility of a Palestinian state.

In the 24-page peace proposal entitled "Toward A Solution," the center proposed a lengthy period of autonomy for the 1.7 million Palestinian residents of the occupied territories as a precursor to possible statehood.

"We are talking about a 10- to 15-year process that begins with a series of confidence-building measures and new concepts on the part of both parties," Alpher said.

The proposed transition period is considerably longer than the five-year interim period suggested by the 1978 Camp David Accords. PLO leader Yasser Arafat advocates an immediate turnover, predicting in a recent interview that a Palestinian state would emerge in two years.

The center recommended Israel should not commit itself to a Palestinian state in advance. But it urged Israel not rule out the possibility, noting that with proper security arrangements the concept of a Palestinian state was not a "mortal danger" to the Jewish state.

To win Palestinian confidence, Israel would have to offer comprehensive self-rule in the West Bank and Gaza Strip, give up control over most state land in occupied zones and stop building Jewish settlements.

Palestinians would have to cease violent acts and terrorism against Israeli targets and accept that Palestinian refugees would not be able to return to Israel.

Arafat, challenged by President Bush to brand as terrorism recent Palestinian attacks on Israel, said he condemned all forms of terrorism but insisted his people are "obliged" to resist the Israeli occupation.

Arafat, visiting the Persian Gulf island nation of Bahrain Tuesday, accused Israel of repeatedly bombarding southern Lebanon to provoke Palestinian military reaction and then label it as terrorism.