The world is losing its last hope of making peace in the Middle East and could face the real danger that the conflict between Israel and the Arab and Muslim worlds will continue indefinitely, according to King Abdullah II of Jordan.

Speaking to The Times near the ancient Nabatean ruins of Petra, the Jordanian monarch admitted that the dire circumstances in the region made progress very difficult. But he concluded that he and other world leaders had no option but to try.

“Now people can say this is not the right time. You have an end of an Administration in the United States, you have got changes in Europe [France, Britain]. You have a very confused situation in Israeli politics,” said the King, who is hosting a World Economic Forum conference by the Dead Sea today, at which regional leaders will gather to take up the debate.

His dire prediction concerns the creation of a viable Palestinian state, the basis of a two-state solution to the 60-year Arab-Israeli conflict. That would require Israel giving up control of the West Bank and Arab East Jerusalem to Palestinians. In return, the entire Arab world has offered to normalise relations with Israel.

King Abdullah said that creation of a Palestinian state was becoming less likely every day, however, because of the continued construction of Jewish settlements and the security wall in the West Bank. Rather than a state, he said, the Palestinians would be left with “Swiss cheese” - a territory riddle with holes.

“We have a finite amount of time. Physically there may not be a chance for a future Palestinian state,” he said. “This is why the urgency is now. Is the situation ideal? Far from it. But we have our backs against the wall and I believe that time is running out.”

He urged all sides to show restraint in Gaza, where rival Palestinian factions have been fighting for the past five days. The narrow coastal strip has also been attacked for the second day running by Israeli aircraft, in retaliation for rockets fired by Hamas militants at a nearby Israeli town. “It is extremely disturbing for all of us. I hope that cooler heads prevail,” he said.

“Arabs and Muslims have realised that this is our last chance. I think it is beginning to dawn on Israelis and Palestinians. They need to reach out to their brothers and sisters and say, ‘We need to take one step back because if this continues we may lose our final opportunity'.”

Part of the problem in finding a solution is the lack of leadership internationally. France and Britain have new leaders with little experience in the region. The Bush Administration is weak and distracted by the war on Iraq.

King Abdullah said that the only glimmer of hope was Germany's Chancellor Angela Merkel, who had assumed the lead.

“I have been extremely pleasantly surprised with the depth of vision of Chancellor Merkel for the Middle East,” said the Jordanian ruler. “She has been here. You will have leadership changes in France and Britain, but Germany plays an important role because it is currently the head of the EU. If you are talking about Middle East issues, they are in good hands with the German leadership.”

Compared with most of its neighbours, Jordan enjoys security and relative economic stability. But the country is vulnerable and feels as if it is in the eye of a regional storm with turmoil raging in Palestine, Lebanon and Iraq.

The Sandhurst-trained Jordanian monarch, who served in the British Army, is particularly concerned about the fallout from Iraq. His country of five million is already host to 750,000 Iraqis and if the violence increases the refugee numbers will swell.

“What we have seen in Iraq is a steady burn. If it was to go to civil war, then it would likely extend beyond the borders. It is a Pandora's Box,” he said. “If there was an escalation and an exodus of more Iraqis to Jordan, that would be very damaging . . .

“You have to be there to support the people who are suffering. You have to balance the need to be there to help with being vigilant against destabilising your own country.” With so many problems to deal with, King Abdullah advised his allies in Washington not to embark on another military action in the region, an attack on Iran's nuclear sites.

“What we do not need is another crisis,” he said. “A strike against Iran would be disastrous. You cannot deal with Iran in isolation. Everything is connected. If you hit Iran, it would have a ripple effect on Iraq, Syria, Lebanon and elsewhere.” King Abdullah confirmed that Jordan was going ahead with plans to build its own nuclear power station. He insisted that it would stay well away from uranium enrichment, the controversial part of Iran's nuclear programme that many suspect is a cover for building an atomic bomb.

“Jordan will be the example of how to do it right,” he said. “In Jordan the issue is extremely transparent. We are a very small country. We are looking for the most clean and efficient systems. Having been a soldier I have a phobia about anything called nuclear.”