Sharon, speaking at a military graduation ceremony outside Tel Aviv Thursday, said Israel must lower its peace expectations.
"A clear-eyed outlook of the continued state of animosity," he said, "demands a different approach than the one we have tried so far with the Palestinians."
Israel and the Palestinians signed their first interim accord in 1993, a framework with a timetable for negotiating a full peace treaty. However, talks broke down in January, because of deep disagreements over core issues like the future of Jerusalem and Palestinian refugees.
Sharon said his aim now is "gradual progress based on interim agreements with the long-term goal of reaching a state of non-belligerence."
Palestinians have said that they are not prepared to negotiate another partial accord with Israel.
Sharon said Israel will continue to hit militants, a reference to a policy of targeting suspected Palestinian activists. On Tuesday, Israeli helicopters fired missiles at Hamas headquarters in Nablus, killing eight people, including a top official of the radical Islamic group responsible for many bombing attacks inside Israel.
Palestinian leader Yasser Arafat this week claimed Sharon's government had decided to target not just terrorist, but Arafat and his Palestinian authority. Israel denied it.
Learn more about the history of the Arab-Israeli conflict.
In an editorial, the official Palestinian news agency, Wafa, called for an end to armed attacks against Israel. It said throwing rocks and shoes at Israelis is "more effective than mortar shells fired at Israeli settlements." The editorial said, "we have to admit that no matter how many casualties we may cause the Israelis, we will not be able to win the war against them."
The editorial said the Palestinians could achieve their goals "only by political means by the use of rocks to fight the Israelis (but) not inside Israel, and not using firearms."
At least 510 Palestinians, 130 Israelis and 13 Israeli Arabs have been killed since the uprising began.
Violence continued Friday. A 6-year-old boy was lightly wounded when Palestinians fired a mortar shell at a Jewish settlement in Gaza. Palestinians said Israeli tanks fired shells in retaliation.
A Palestinian women tried to carry a bomb into the Tel Aviv central bus station, police said, but security guards challenged her and she dropped the bag with the bomb. Police arrested the woman, cleared the area anwere defusing the device.
In Jerusalem, Friday prayers ended peacefully after Israeli police banned Palestinian men under 40 years old from entering the Al Aqsa Mosque compound to prevent riots. Clashes erupted Sunday at the disputed site, holy to both Muslims and Jews.
In Nablus, hundreds of Palestinians gathered to bury a man killed by Israeli soldiers on Thursday.
The army said Firas Abdel Al-Haq had been found planting a bomb near a Jewish settlement. The shooting triggered an hour-long gun battle. Mourners called for revenge.
Late Thursday, Palestinians aimed mortar shells at Jewish settlements in Gaza and fired rifles and grenades at Israeli army positions, the Israeli military said.
Israeli tanks shelled residential areas in central Gaza and moved about 800 yards into Palestinian-controlled territory, Palestinian security officials said. Israeli military sources said a tank chased the Palestinians who were firing the mortars.
Israeli tanks and armored vehicles also entered Palestinian territory in two other places in Gaza, Palestinian security officials said. The incursions followed Palestinian gunfire and mortar attacks.
Palestinians continued the crackdown on those believed to be helping Israel. A suspected collaborator was found dead Friday, the fourth killed this week.
In two trials this week, a Palestinian security court sentenced a total of four men to death by firing squad for collaborating with Israel in the killing of Islamic militants in July and December.
The Palestinian Authority warned militants against taking the law into their own hands in the search for collaborators. Arafat must ratify the death sentences before they are carried out.
©MMI, CBS Worldwide Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press and Reuters Limited contributed to this report