Dan Balilty / AP President Bush attends an Israeli Presidential Conference along with Israel's Prime Minister Ehud Olmert, top, and Israel's President Shimon Peres in Jerusalem on Wednesday.

JERUSALEM — President Bush put an optimistic face on fading hopes for Mideast peace Wednesday, declaring that Israel's 60-year triumph over war and tragedy shows democracy can succeed everywhere. But Bush's upbeat message was marred by rocket fire from Gaza and threats of heavy retaliation by Israel.

Intended as an occasion for celebrating Israel's birthday, Bush's visit instead brought bursts of fresh violence, ominous warnings and disputed claims that Israel plans to expand settlement activity in the West Bank, a development that could undermine peace talks with Palestinians. It appeared that all sides were vying for the president's attention.

Bush and Prime Minister Ehud Olmert discussed the peace process and threats to Israel's security — only to learn that a rocket fired from Gaza had hit a crowded shopping center in the southern Israeli city of Ashkelon. At least 14 people were wounded. Two militant groups, the Iranian-backed Islamic Jihad and the Hamas-linked Popular Resistance Committees, claimed responsibility.

"What happened today is entirely intolerable and unacceptable," Olmert said at a conference where Bush was honored. "The government of Israel is committed to stopping it, and we will take the necessary steps so that this will stop." The audience erupted in applause before he finished the sentence.

The White House blamed Hamas, which controls the Gaza Strip. "Political goals will never be achieved by launching rockets from Gaza onto innocent women and children," the White House said.

Bush was the star guest

Politically weakened by corruption allegations, Olmert found it necessary to offer quiet assurances about his standing. "Holding on, holding on. Don't worry," Olmert was overheard telling Bush's national security adviser, Stephen Hadley.

Welcomed as Israel's closest ally, Bush was the star guest at an evening of music, dance and speeches marking the 60th anniversary of Israel's founding in the wake of the Nazi genocide of 6 million Jews. His approval ratings are at record lows at home, but he got a hero's reception in Israel.

The audience of a few thousand people included American businessman Sheldon Adelson, whom Israeli police questioned Monday in the Olmert probe. In 1948, the United States was the first country to recognize Israel, 11 minutes after its statehood declaration. In that momentous decision, President Truman broke with his secretary of state, George Marshall, and most of the foreign policy experts.

"Because Harry Truman did what was right instead of following the conventional wisdom, we can say today that America is Israel's oldest and best friend in the world," Bush said to cheers from conference guests.

"America stands for peace and so does Israel," Bush said. "And as we stand in peace, we must understand the realities of the world in which we live. We must be steadfast. And we must be strong in the face of those who murder the innocent to achieve their objectives. In the long run, we share a powerful belief and a powerful weapon against the terrorists. We believe that the surest way to defeat the enemies of hatred is to advance the cause of hope through the cause of freedom."

Olmert told Bush: "You are an unusual person. You are an unusual leader. And you are an unusual friend of the people of Israel."

Bush's eyes teared up as he tried to hold back his emotion. He received an ovation from the audience and soon got a hug from Olmert.

With barely 250 days remaining in his presidency, Bush is trying to leave his mark with a historic peace agreement and the foundations for a Palestinian state before he leaves office in January.

Palestinians' dire poverty

"I suspect if you looked back 60 years ago and tried to guess where Israel would be at that time, it would be hard to be able to project such a prosperous, hopeful land," Bush said as he opened talks with Israel's president, Shimon Peres. "No question, people would have said, Well, we'd be surrounded by hostile forces.'

"But I doubt people would have been able to see the modern Israel, which is one reason I bring so much optimism to the Middle East, because what happened here is possible everywhere," Bush said.

But Israel's success stands in contrast to the dire poverty suffered by millions of Palestinian refugees and their descendants scattered in the West Bank and Gaza and in desperate camps across the Middle East.

The creation of Israel was the birth of the Palestinian refugee problem; Palestinians refer to Israel's creation as "al-Naqba," or "the catastrophe."