PARIS, July 13, 2008 (AFP) - French President Nicolas Sarkozy and more than 40 leaders opened a summit on Sunday to launch a new union of Mediterranean nations amid hopes it could bring fresh impetus to Middle East peace efforts.

Flanked by Egyptian President Hosni Mubarak and United Nations chief Ban Ki-moon, Sarkozy urged the leaders -- representing some 756 million people -- to set aside their differences and work toward a common future.

'The entire world is watching you,' he said. And the question they were asking, he added, was this: 'Is this generation of political leaders up to the challenge of peace?'

The meeting saw Syrian President Bashar al-Assad return to the international stage, seated alongside Arab leaders at the same table as Israeli Prime Minister Ehud Olmert.

Sarkozy said Arab states had made a 'gesture of peace' by attending the inaugural summit of the Union for the Mediterranean and that European leaders would 'build peace in the Mediterranean, just as yesterday we built peace in Europe.'

Leaders meeting under the glass dome of the Grand Palais in Paris were to agree on joint projects, rather than big political goals, with the focus squarely on economic cooperation.

But the new union was also seen as a forum that could help promote peace in the Middle East.

Mubarak called for Israelis and Palestinians to step up their efforts to reach a peace deal that would pave the way for the creation of a Palestinian sate.

On the sidelines of the summit, France stepped up its Middle East diplomacy, with Sarkozy hosting Israeli-Palestinian talks after meeting Saturday with Assad and Lebanon's new president.

'We have never been as close to an accord as we are today,' Olmert told reporters after talks with Palestinian president Mahmud Abbas, in the presence of the French leader.

Through his energetic lobbying, Sarkozy put the summit on the road to success by getting almost everyone to the venue, although the Elysee dropped plans for an official group photograph, due to objections.

'I want to hail the courage of all those who answered our invitation,' he said. 'I want to salute Arab heads of state for being here, for accepting this responsibility and in that way making a gesture of peace,' said Sarkozy.

Libyan leader Moamer Kadhafi boycotted the meeting, while Jordan's King Abdullah II and King Mohammed VI of Morocco sent senior representatives.

To sidestep differences between Israel and its Arab neighbours, the new forum will concentrate on a series of modest regional projects such as cleaning up pollution in the Mediterranean sea or developing solar energy.

The union aims to build on the EU's 13-year-old Barcelona process, which was plagued by disputes between Israel and its Arab neighbours.

'The world is not going to be changed by the meeting today,' Swedish Foreign Minister Carl Bildt said. 'But the entire region will, hopefully, be changed over time by this particular approach.'

Drawing up a final declaration has proved difficult, with references in a draft version to the fight against weapons of mass destruction likely to be cut out, or watered down.

Some partners remain reluctant to take part in projects with Israel.

Most emphasis in the draft text is on raising the public profile of the forum, by setting up a joint presidency -- with France and Egypt set to take the first turn -- and organising summits every two years.

A secretariat will also be created to supervise the projects, but its composition, size and location are not to be decided before November.