After meeting Mr Abbas on the third leg of a Middle East tour aimed at reviving the peace process, Ms Rice said the Palestinians should be served by a government "that observes the quartet principles and that can form the basis then for movement forward on what we all desire.
"And that is a two-state solution, a solution in which a democratic
Palestine and a democratic Israel can live side by side in peace," she told a joint news conference with Mr Abbas in the West Bank town of Ramallah.
Mr Abbas, in a standoff with the governing Islamist Hamas movement over a platform for a national unity government, said any future cabinet would have to abide by past peace deals -- one of the key Western demands to which Hamas refuses to accede.
"Today we say that any government to be formed has to be fully committed to all Palestinian, Arab and international legality and fully respect the agreements signed by the Palestinian Authority and the Palestine Liberation Organisation," he said.
Mr Abbas reiterated that stalled talks with Hamas on forming a unity government could not go on forever and warned that "the Palestinian leadership will decide on the measures to take to get us out of this crisis."
The so-called quartet -- the European Union, Russia, the United Nations and the United States -- which boycotted the Hamas government, demands that any new cabinet must recognise Israel, renounce violence and abide by past peace deals.
Hamas has so far refused immense pressure to soften its stance and Prime Minister Ismail Haniya accused Washington of serving its own interests.
"The American administration only wants to reshape the region and the Palestinian territory in a way that only serves the American and the Israeli agenda," he said.
Ms Rice, who was due to meet Israeli Prime Minister Ehud Olmert for a private dinner on Wednesday evening, heaped praise on the moderate Mr Abbas.
"Because he is a leader that people respect, he is going to continue to have not just the attention of the international community but very intensive efforts to try to break through some of the deadlock that has been there and I think we will make progress," she said.
The secretary of state arrived in Ramallah after brief talks with representatives of the president's moderate Fatah party and independent Palestinian MPs at the US consulate in east Jerusalem.
On Thursday, she is due to hold talks in Jerusalem with her Israeli counterpart Tzipi Livni and Defence Minister Amir Peretz.
A senior Israeli security official said that Mr Peretz will present the visiting secretary of state with options for reopening the crossings into the impoverished Gaza Strip.
Ms Rice began her tour with talks in Saudi Arabia and Egypt in the hope of shoring up moderate Arab support for the peace process.
She said a new configuration of allies involves the Gulf Cooperation Council -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- along with Egypt and Jordan, and would be called the GCC+2.