"The wound that is still fresh even after 40 years is the continued occupation of Arab territory and the denial of legitimate Palestinian claims to statehood," he said in his speech at the 19th Arab Summit here.
"The basis for a solution is clear: the end to the occupation that began in 1967, the creation of an independent and viable Palestinian state alongside as secure and fully-recognized state of Israel, and the lasting comprehensive peace in the region as called for in the resolution of the United Nation Security Council."
Ban commended Palestinian President Mahmoud Abbas for his leadership and his commitment to peace with Israel, which he described as "unambiguous." He also said the Palestinian leader was determined to approach Palestinian unity in support of that cause.
He also described the new Palestinian national unity government as "an important step forward".
"I congratulate His Majesty King Abdullah and the other Arab leaders for help making this agreement possible," he said.
The UN secretary-general encouraged the new Palestinian unity government to take actions that would demonstrate its true commitment to a negotiated two-state solution.
"I encourage Israel to do the same by curbing settlement activity and barrier construction in the West Bank and engaging in serious dialogue with President Abbas for a final settlement."
He said the broader Arab world continues to have a decisive role to play, calling the Arab peace initiative as "one of the pillars of the peace process."
"Endorsed in the road map, the initiative sends a clear signal that the Arab world wants to create peace," he added. He said that prior to his arrival in Riyadh he had urged the Israelis to take a fresh look the Arab peace initiative.
"Here in Riyadh, I urge you, my Arab friends, to use this summit to reaffirm your commitment to this initiative," he added. "The Arab peace initiative suggests a new way forward to the region."
Ban described the status quo as "dangerous", but said there was room still for optimism: "Solving this conflict is a moral and strategic necessity," he said, adding that political divisions in the Arab world have caused despair and unemployment among the young generation.
He also called for more "dynamic and civil societies" to be established in the Arab world.
Resolving the political situation in Lebanon should be another priority for the Arab leaders, said the UN chief. "Lebanon continues to go through internal political turmoil," he pointed out. He urged Arab leaders to support the democratically elected government of Fouad Siniora.
Ban called the Iraq situation "troubling" and praised Arab efforts to help the victims of the war. "I commend Jordan and Syria in particular for extending their hands to so many Iraqis in need," he said.
He said next month the UN would hold an international conference to mobilize financial and other support to meet the urgent needs of those who have been displaced. "I am solely committed to having the United Nations do more in particular areas, such as political facilitation," he said. "The UN is also devoting itself to the country's economic development and social recovery."
He said that improving security in Iraq would not only require military means, "but genuine efforts to promote national reconciliation." Ban also talked about the Darfur issue in Sudan, urging Arab leaders to prioritize the matter.