The breakthrough marks a small but important step toward easing tensions in the Middle East. Clinton made the announcement at the State Department with special Mideast peace envoy George Mitchell at her side.
"As we move forward, it is important that actions by all sides help to advance our effort, not hinder it," Clinton said. "There have been difficulties in the past; there will be difficulties ahead. Without a doubt, we will hit more obstacles. The enemies of peace will keep trying to defeat us and to derail these talks. But I ask the parties to persevere."
The office of Israeli Prime Minister Benjamin Netanyahu quickly issued a statement welcoming the U.S. plan.
"Reaching an agreement is a difficult challenge but is possible," the Netanyahu statement said. "We are coming to the talks with a genuine desire to reach a peace agreement between the two peoples that will protect Israel's national security interests, foremost of which is security."
Clinton said the face-to-face talks are to begin Sept. 2. She said the hope is that a comprehensive peace agreement can be reached within one year.
"We believe it can be done within a year and that is our objective," Mitchell told reporters. The U.S., he said, will offer "bridging proposals" designed to advance the negotiations, but he was not specific.
Mitchell said subsequent negotiating sessions with Netanyahu and Palestinian President Mahmoud Abbas probably will be held in the Mideast, but he mentioned no specific site.
Also invited to attend the Washington session are Egyptian President Hosni Mubarak and Jordan's King Abdullah II, "in view of their critical role in this effort," Clinton said.
President Barack Obama will hold one-on-one talks with each of the four leaders, separately, on Sept. 1, followed by a dinner with them, Clinton said.
Former British Prime Minister Tony Blair, the special representative of the "Quartet" of Mideast peacemakers - the U.S., the U.N., the European Union and Russia - also has been invited to attend the dinner, she said.
Clinton said she would then host the first direct Israel-Palestinian negotiating session on Sept. 2.