U.S. holds firm against Israel settlement policy

Israel's Prime Minister Benjamin Netanyahu attends the weekly cabinet meeting in his office in Jerusalem, March 21, 2010.

WASHINGTON (Reuters) - Secretary of State Hillary Clinton said on Monday Israel's policy of expanding Jewish settlements endangered the peace process as Prime Minister Benjamin Netanyahu arrived seeking a way forward on talks with the Palestinians.

There were few signs that tensions in U.S. relations with its key Mideast ally, which have surged in recent weeks amid a spat over settlement policy, were over.

Netanyahu was due to meet President Barack Obama, Clinton and other top U.S. officials on the three-day trip, but the meetings were kept low-key with almost no media access.

The United States and Israel have clashed since Netanyahu's government this month announced a new expansion of a Jewish settlement in East Jerusalem, embarrassing visiting U.S. Vice President Joe Biden and prompting Palestinian President Mahmoud Abbas to threaten to pull out of indirect peace talks that had only just been launched.

Clinton called the announcement "insulting" and demanded that Netanyahu outline specific steps to restore confidence in the peace process -- something both sides say he has now done, although neither side has released specifics.

Clinton, in a speech to the influential pro-Israel AIPAC lobby in Washington on Monday, said Israel faced "difficult but necessary choices" on Mideast peace and called Israel's settlement policy a problem.

"New construction in East Jerusalem or the West Bank undermines mutual trust and endangers the proximity talks that are the first step toward the full negotiations that both sides want and need," Clinton said.

"It exposes daylight between Israel and the United States that others in the region could hope to exploit. And it undermines America's unique ability to play a role -- an essential role, I might add -- in the peace process."

EMOTIVE ISSUES

Netanyahu, before leaving for Washington, appeared to hold firm to the settlement strategy and his spokesman said he would stress that Jerusalem -- which Israel regards as its capital -- was "not a settlement."

The Obama administration's firm line on Israel drew fire from senior Republican members of the House of Representatives, highlighting what could become an emotive issue in this year's U.S. congressional elections.

"Now is not the time to be picking fights with Israel in what seems to be an attempt to curry favor with the Arab world," Eric Cantor, the No. 2 House Republican, said in a speech to AIPAC.

U.S. officials said a Monday meeting between Clinton and Netanyahu had been changed from State Department headquarters to Netanyahu's hotel, and U.S. reporters would not have access to a joint photo opportunity.

Asked if the change reflected continued tensions between the two sides, State Department spokesman P.J. Crowley said the switch was made at Israel's request.

"I don't know the reason for the shift but that is something that is an Israeli prerogative," Crowley said. "I wouldn't read anything into the change in venue nor into the change in media coverage."

Netanyahu's meeting with Obama on Tuesday was likely to be similarly low-key, with no public statements expected. White House spokesman Robert Gibbs's list of goals for the meeting was modest.

"The president is hopeful that we will in this meeting make progress and get -- without getting into the intricacies of it -- get these two parties not just back physically to talks but to the type of relationship that is necessary for those talks to bear fruit," he said.

The low-profile White House meeting may at least avoid further irking Palestinians at a time when Obama is trying to persuade them to return to indirect talks despite the Israeli leader's position on settlement expansion.

DEFIANT ON SETTLEMENTS

Before his departure for Washington, Netanyahu appeared defiant on settlements, saying Israel would not stop Jewish settlement construction in areas around East Jerusalem captured by Israel in 1967.

Citing biblical and historical links, Israel sees all of Jerusalem as its capital, a claim not recognized internationally. The Palestinians want East Jerusalem to be the capital of a future state on the West Bank and the Gaza strip.

Netanyahu will address the American Israel Public Affairs Committee (AIPAC) conference on Monday. His spokesman, Mark Regev, said the speech would focus on Iran, the peace process and U.S.-Israel relations, and would stress that Jerusalem is Israel's capital and "not a settlement."

Palestinian officials have continued to insist that Israel's decision to continue settlement building in and around East Jerusalem would prove fatal to the peace process.

Under U.S. and international pressure, Netanyahu announced a 10-month moratorium on new housing starts in Jewish settlements in November. But he excluded East Jerusalem and nearby annexed areas of the West Bank from the building freeze.

Clinton, who last year praised Netanyahu's moratorium announcement, said on Monday the United States still regarded continued Jewish settlements as illegitimate and urged both sides not to take steps to undermine the fragile peace effort.

U.S. envoy George Mitchell urged "a period of calm and quiet" after meeting Palestinian President Mahmoud Abbas in the Jordanian capital Amman on Monday. The State Department said Mitchell later left en route for Washington.

(Additional reporting by Suleiman al-Khalidi in Amman and Matt Spetalnick in Washington, editing by Will Dunham and Todd Eastham)