Israelis want peace but won't be suckers: Netanyahu

JERUSALEM (Reuters) - Prime Minister Benjamin Netanyahu said Thursday before talks with a U.S. envoy seeking a freeze in Jewish settlement activity that Israelis would compromise for peace but were "not ready to be suckers."

Addressing supporters of his right-wing Likud party, Netanyahu said he would insist that settlers be permitted to "live normal lives," a euphemism for accommodating what he sees as "natural growth" in the enclaves built in occupied land.

Netanyahu's remarks in Tel Aviv came as Washington's envoy, George Mitchell, was due at the weekend to try and finalize a deal for a possible meeting at the United Nations General Assembly this month of Netanyahu, Palestinian President Mahmoud Abbas and U.S. President Barack Obama.

Netanyahu, whose refusal so far to stop settlement activity has led to a rare Israeli rift with Washington, said as he toasted the Jewish New Year that settlers were "good and loyal citizens of Israel. You deserve to live normal lives."

Israel would back diplomatic efforts but "permit you (settlers) to live normal lives," Netanyahu said in Tel Aviv. He said Israel wanted peace, but "we are not ready to be suckers."

Some 500,000 Israelis live in settlements in the West Bank, land which Israel captured in a 1967 war and Palestinians seek for a state, and Arab East Jerusalem, which Israel has annexed as part of its capital in a move not recognized internationally.

Palestinians, who number about three million in the West Bank, say settlements deprive them of land for a viable country.

Abbas has demanded a halt to settlement activity before peace talks with Israel, stalled since December, may resume, citing a 2003 peace "road map" backed by Western countries that calls for a halt to the settlements as well as Palestinian measures to prevent violence against Israel.

U.N. Secretary-General Ban Ki-moon expressed "deep concern" when Israel announced Wednesday it had approved construction of 455 additional settler homes, in a move Israeli officials said could pave the way for a settlement moratorium later on.

Ban said in a statement that settlement building was "contrary to international law." The World Court has deemed the settlements are illegal. Israel disputes this.

Turning to economics, Netanyahu, a former finance minister, said Israel had not yet emerged totally from a crisis of the past year, adding "but we are on the right path."

Israel's central bank raised the key lending rate last month for the fist time in more than a year, a move seen as reflecting indicators of new economic growth. The rate was moved up by a quarter point to 0.75 percent.

Netanyahu said that Israel, which passed its first two-year budget this summer, was "considering" the possibility of doing the same for fiscal 2011-2012 in the interest of generating greater economic stability.