Obama, Netanyahu seek to defuse U.S.: Israel tensions

WASHINGTON (Reuters) - U.S. President Barack Obama and Israeli Prime Minister Benjamin Netanyahu met on Tuesday in a bid to ease strained ties but with dim hopes for any breakthrough in the stalled Middle East peace process.

The talks, unusually low profile for a visiting Israeli leader, were held a day after Netanyahu struck a defiant note in the face of new U.S. criticism of Jewish home construction in a part of the occupied West Bank annexed to Jerusalem.

American and Israeli officials have sought to get relations back on track after the housing dispute touched off the worst diplomatic rift between Washington and its close ally since Obama took office last year.

In a sign of White House concerns about lingering tensions, press coverage of the Oval Office talks was barred and no public statements were planned.

Netanyahu, under intense pressure at home from members of his right-leaning coalition, was showing few signs of backing down during his American trip.

Before seeing Obama, Netanyahu told U.S. lawmakers he feared peace talks may be delayed for another year unless Palestinians drop their demand for a full freeze on Jewish settlements.

"We must not be trapped by an illogical and unreasonable demand," Netanyahu said during a meeting with House of Representatives Speaker Nancy Pelosi and other congressional leaders, according to his spokesman.

"It could put the peace negotiations on hold for another year," he said of the talks, which have been suspended since December 2008.

Palestinian officials said it was Netanyahu's policy that was keeping the peace process in limbo.

The Palestinians retreated from their agreement to begin indirect, U.S.-mediated peace talks two weeks ago after Israel announced plans to build 1,600 homes for Jews in an area of the occupied West Bank annexed to Jerusalem.

KEEPING OUT OF SPOTLIGHT

Despite a promise from Netanyahu of confidence-building steps -- which have not been disclosed publicly -- to encourage Palestinians to return to talks, the White House sought to keep his meeting with Obama out of the spotlight.

It was held in the early evening after Obama's signing of landmark healthcare reform bill.

The announcement of the disputed housing project coincided with a visit to Israel this month by Vice President Joe Biden and drew strong U.S. condemnation.

Israel captured East Jerusalem, along with the West Bank, in a 1967 war and regards all of Jerusalem as its capital. The Palestinians want East Jerusalem as the capital of a state they hope to establish in the West Bank and Gaza Strip.

"Netanyahu's policy is the one that is obstructing the return to negotiations," Nabil Abu Rdainah, a senior aide to Palestinian President Mahmoud Abbas, told Reuters in the West Bank city of Ramallah.

"We are ready to go back to negotiations if Netanyahu adheres to what came in the statement of the Quartet."

At a meeting in Moscow on Friday, the Quartet of mediators -- the United States, the European Union, Russia and the United Nations -- called on Israel to freeze settlement activity in line with a 2003 peace "road map."

That plan also obliged the Palestinians to take action to disarm militants.

Netanyahu began his Washington visit on Monday, delivering a defiant address to the influential pro-Israel lobby AIPAC in which he declared "Jerusalem is not a settlement."

(Additional reporting by Susan Cornwell; editing by Chris Wilson)