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Israel and the Vatican announced Wednesday they are establishing formal ties and exchanging ambassadors, capping a drive to heal Catholic-Jewish rifts and give new impetus to Mideast peace.

The announcement was made both in Jerusalem and at the Vatican after an agreement was signed in Jerusalem on Tuesday.The Jewish state and the Holy See recognized each other Dec. 30 and agreed on a two-year period of normalization to overcome 2,000 years of bloodshed, anti-Semitism and painful political relations that left them on opposite sides of the Mideast conflict.

The Vatican called the accord a "further instrument and privileged channel of dialogue" between the Holy See and Israel.

Deputy Foreign Minister Yossi Beilin portrayed the agreement as a fruit of the peace process between Israel and the Arab world, especially the Palestine Liberation Organization.

"Many skeptics believed that it would be difficult, maybe impossible, to establish full diplomatic relations with the Vatican without a comprehensive peace agreement in the Middle East," Beilin said.

Israeli officials said it was significant the agreement on full relations was signed in Jerusalem because of the Vatican's long opposition to Israeli sovereignty over the city.

The Vatican, which has a following of tens of thousands of Christian Arabs in the Mideast, until recent years had endorsed the holy city being under international control.

The Vatican is expected to open its embassy in Jaffa, a former Arab town that is now part of Tel Aviv and has a sizeable Christian Arab population.

The ambassadors likely to be named are Archbishop Andrea di Montezelmolo, who signed the agreement for the Vatican, and Shmuel Adaf for Israel, a former ambassador to Spain.

Reports have circulated that Pope John Paul II would visit the Holy Land soon, but Beilin said he had no specific information on such a trip.

The Vatican has moral authority over the world's 900 million Roman Catholics, and Israeli officials hope it will take an active role against anti-Semitism.

Church teaching until 1965 assigned blame for Christ's crucifixion to the Jews.