FACTBOX: Factors to watch from Israel, Palestinians

(Reuters) - U.S. President Barack Obama brings Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas together on Tuesday for the first time, but obstacles still block the restart of formal peace talks.

Here is the state of play on key issues affecting Israel and the Palestinians and the factors to watch in coming weeks:

More process than peace after two decades of talking, Obama is set on getting Netanyahu, who won power in March, and Abbas to relaunch negotiations on an agreement that would create a Palestinian state in the West Bank and Gaza Strip and resolve disputes over the future of Jerusalem and Palestinian refugees.

The three meet on Tuesday during the U.N. General Assembly after Obama's Middle East envoy, George Mitchell, completed a week shuttling around the region, unsuccessfully trying to seal a deal with Israel on a West Bank settlement freeze.

U.S. officials caution against expectations of a breakthrough at the summit, saying only that Obama hopes to narrow the gaps between the two sides, which have not held peace negotiations since December after a year of inconclusive talks.

Obama and Abbas have demanded publicly that Israel halt all settlement activity in line with a 2003 peace "road map" that also commits Palestinians to a crackdown on militants.

Abbas, boosted by elections in his Fatah party, conditions the revival of peace talks on a freeze.

Netanyahu, whose coalition has a strong pro-settler wing, has rejected a total cessation of building within settlements, saying the "natural growth" of settler families must be accommodated. Washington has explicitly rejected that argument.

Netanyahu offered Mitchell a nine-month freeze in settlement building in the West Bank, Israeli officials said, adding that the envoy was pressing for a one-year suspension. Abbas wants an open-ended halt that also includes East Jerusalem, which Israel captured along with the West Bank in a 1967 war.

In the days and weeks after the New York summit, watch for a U.S.-Israel compromise on a freeze timeframe, with exemptions for ongoing projects.

Looking ahead to a final peace accord, Netanyahu wants Palestinians to accept Israel as a Jewish state. Abbas rejects that. Obama is unlikely to let a row over that issue prevent at least a start to negotiations.

Obama is also pressing Arab states for goodwill gestures to Israel to aid the process. Little sign of those yet, but watch for Netanyahu to repeat in New York his call for Arab countries to take action.

More fundamentally, there is disagreement on a Palestinian demand for Israel to agree to negotiate a permanent resolution of all the core issues of the conflict. They include borders, the fate of Palestinian refugees and the status of Jerusalem.

Netanyahu, who highlights the fact that Abbas's authority is limited since Islamist Hamas seized Gaza in 2007, has suggested any relaunched peace talks focus on interim improvements in security and prosperity.

If talks resume, the outlines of a possible accord remain those of a decade ago, as do the elements of discord. The rift between Fatah and Gaza's Hamas Islamists, shunned by Israel and the West, is a further obstacle. Talk of Obama setting a goal of deal in two years is met with scepticism.

Hamas has made clear it would not recognize any compromise Abbas made with Israel.

(Writing by Alastair Macdonald and Jeffrey Heller; Editing by Samia Nakhoul)