President George W Bush said last night the Iraqi election had opened a "new phase" in the troubled country, allowing American forces to shift their attention from stemming the insurgency to training Iraqi security forces.

His comments in the annual State of the Union address were the closest he has come yet to conceding that his administration is formulating an exit strategy from Iraq.

Addressing Congress, he stopped short of giving an exit date for the 150,000 American soldiers in Iraq, saying it was too soon to give a timetable.

But he made clear that he saw American forces increasingly engaged in training Iraqis to take over their responsibilities rather than fighting.

"The new political situation in Iraq opens a new phase of our work in that country," he said.

"We will increasingly focus our efforts on helping prepare more capable Iraqi security forces - forces with skilled officers and an effective command structure."

The new Iraqi forces are still far from ready to assume responsibility for their country´s security.

But Mr Bush, clearly buoyed by Sunday´s images of Iraqis defying the terrorists and lining up to vote, insisted that the American mission would succeed "because the Iraqi people value their own liberty - as they showed the world last Sunday".

Mr Bush was more pragmatic last night than in his ambitious and visionary inaugural address last month when he trumpeted his muscular foreign policy and talked of America bringing freedom to the "darkest corners of the world".

Unlike in his last three State of the Union speeches, he assiduously emphasised the merits of diplomacy - thus giving a boost to his new secretary of state, Condoleezza Rice, as she arrives in London today at the start of a week-long tour of Europe and the Middle East.

In particular he made clear that America was committed to helping achieve a settlement in the Middle East, saying that the creation of an independent Palestinian state was "within reach".

In a clear attempt to reach out to the new Palestinian leader, Mahmoud Abbas, he pledged increased assistance for the Palestinians, including an aid package that could total nearly $350 million to fund development and security. Mr Bush shunned Mr Abbas´s predecessor, Yasser Arafat, who died last year, as an obstacle to peace.

"The goal of two democratic states, Israel and Palestine, living side by side in peace is within reach - and America will help them to achieve that goal," Mr Bush said.

Symbolically, an Iraqi and an Afghan voter were flown in to sit alongside Laura Bush, the First Lady, in the presidential box as Mr Bush addressed the joint session of Congress.

Some Republican congressmen had dipped their fingers in purple ink to show their solidarity with Iraqi voters.

For the past three years Mr Bush´s State of the Union addresses have been focused on foreign policy, most strikingly in 2002 when he named Iran, Iraq and North Korea as being part of an axis of evil.

But last night the emphasis was on his domestic agenda as he sought to build support for his revolutionary proposal to reform Social Security, the 70-year-old programme that has traditionally been seen as untouchable for politicians.

He also called on Americans to bear the burden for the war in Iraq, proposing tight caps on government spending in all areas but defence and homeland security.

In particular he was keen to shed the reputation he won in his first term as a "spend spend" president who had abandoned the Republicans´ traditional belief in fiscal discipline.

He said ´´we must be good stewards of this economy´´. The costs of the Iraq war, combined with a huge commitment to reform the health scheme for the elderly, his sweeping tax cuts, and a reluctance to rein in Congressional spending in the countdown to last November´s election led to a record budget deficit.

Before the war began in 2003 the administration predicted it would cost about $60 billion (£31.5 billion). But the cost is already three times that, and Mr Bush is expected soon to ask Congress for another $80 billion (£42.5 billion).

His address brimmed with optimism but he has much to do if he is to gain the support to push through his radical agenda.

His job approval ratings are at just 50 per cent, a very low figure for a president beginning a second term. (© Copyright of Telegraph Group Limited 2004. 02/03/05)