Israel, U.S. seek to defuse settlement dispute

Israel's Prime Minister Benjamin Netanyahu (L) speaks during a joint news conference with USecretary of State Hillary Clinton before their meeting in Jerusalem in this October 31, 2009 file photo.

JERUSALEM/MOSCOW (Reuters) - Israel tried to defuse a dispute with the United States on Friday over plans to expand settlements, saying it would propose "confidence-building" steps to the Palestinians to encourage a renewal of peace talks.

Relations between Israel and its the United States, its main backer, have been frayed by Israel unveiling plans to build 1,600 housing units near occupied East Jerusalem during a visit by U.S. Vice President Joe Biden last week.

The construction announcement, which U.S. Secretary of State Hillary Clinton has called "insulting," has jeopardized indirect peace talks between Israel and the Palestinians that the United States announced last week after months of effort.

Those talks may be further undermined by more violence in the Hamas-ruled Gaza Strip, where Israeli aircraft bombed a target on Friday after a rocket fired from the Palestinian enclave killed a Thai worker in Israel.

In separate statements, Israel and the United States said Clinton and Israeli Prime Minister Benjamin Netanyahu spoke by telephone and they signaled they were trying to lay the dispute to rest.

"The prime minister proposed to Secretary Clinton mutual confidence-building steps by Israel and the Palestinian Authority in the (West Bank)," Netanyahu's spokesman Nir Chefetz said in a statement.

State Department spokesman P.J. Crowley told reporters in Moscow, where Clinton will attend a meeting of Middle East peace mediators on Friday, they discussed specific actions that might improve the atmosphere for progress toward peace.

"We are going to review the prime minister's response and continue our discussions with both sides to keep proximity talks moving forward," he said.

U.S. Middle East peace envoy George Mitchell will visit the region this weekend to meet Netanyahu and Palestinian President Mahmoud Abbas, he said.

NETANYAHU ON PROBATION?

U.S. officials declined all comment on precisely what steps Netanyahu had proposed.

In an unsourced report on its website, the Israeli newspaper Haaretz said the measures were likely to include the release of Palestinian prisoners, the removal of West Bank checkpoints and the possible transfer of West Bank land to Palestinian control.

Chefetz said Netanyahu had "clarified" Israeli policies, presumably about settlements and Jerusalem, a city Israel sees as its capital although this is not recognized internationally.

The Palestinians want East Jerusalem, captured by Israel in the Six-Day War in 1967, to be capital of a future state that they seek for the occupied West Bank.

"I think they do want to defuse but also they are aware that Netanyahu is not agreeing to anything of real consequence and is staying deep within his own comfort zone," said Daniel Levy of the New America Foundation think tank in Washington.

"(The) U.S. will want to see what he actually implements and in a way to keep him on probation," Levy said. "The Palestinians will probably reluctantly find themselves in indirect talks, unless Gaza escalates dramatically."

A U.S. official who spoke on condition of anonymity said Netanyahu was likely to meet senior U.S. officials, including Clinton, when he visits Washington early next week to speak at an annual conference run by the America Israel Public Affairs Committee, an influential pro-Israel lobby group.

The U.S.-Israeli dispute and the efforts to calm it were sure to come up at a meeting in Moscow on Friday of the Quartet of Middle East peace mediators, which includes the European Union, Russia, the United Nations and the United States.

In the Gaza strike, Israeli war planes hit at least four targets, Hamas security officials and witnesses said.

There were no immediate reports of injuries in any of the strikes, whose targets included a smuggling tunnel along the border with Egypt, two open areas in Khan Younis and a metal foundry near Gaza City.

Palestinian militants in Gaza have carried out sporadic rocket and mortar bomb attacks on Israel since the end of a three-week Gaza war in January 2009.

(Additional reporting by Andrew Quinn in Washington, Mohammed Assadi in Ramallah and Dan Williams in Jerusalem; Editing by Angus MacSwan)