U.S. presses Israel for Mideast goodwill steps

Women walk in front of the compound known as the Shepherd's Hotel in the Sheikh Jarrah neighbourhood of East Jerusalem, March 24, 2010.

WASHINGTON (Reuters) - Israeli Prime Minister Benjamin Netanyahu was poised to end a troubled U.S. visit on Wednesday with little sign he had settled a dispute with the White House over Jewish housing construction in East Jerusalem.

President Barack Obama was seeking goodwill gestures from Israel to persuade Palestinians to return to peace talks even as new settlement expansion plans on disputed land in Jerusalem threatened further strains between Washington and its close ally.

"The president asked the prime minister to take steps to build confidence for proximity talks so that progress can be made toward comprehensive peace," White House spokesman Robert Gibbs told reporters, referring to indirect negotiations.

"There are areas of agreement and there are areas of disagreement," he said without elaborating.

Palestinians have demanded a complete settlement freeze in the occupied West Bank and East Jerusalem, areas Israel captured in a 1967 war.

Netanyahu has cautioned that accepting their terms for reviving negotiations, in the format of U.S.-mediated, indirect talks, could put peace efforts on hold for another year.

The Israeli leader, who held a low-key meeting at the White House on Tuesday with Obama, was engaged in an all-day effort to ease the dispute with Washington before his departure home.

Obama's Middle East envoy, George Mitchell, met Netanyahu at the prime minister's hotel, and Israeli and U.S. officials convened on the sidelines, but both sides gave no public sign of a breakthrough on the tinderbox settlement issue.

U.S. officials have tried to get Israel to agree to suspend further Jewish home construction in East Jerusalem and to consent to discuss core issues such as borders and the status of Jerusalem in the U.S.-sponsored "proximity" negotiations.

Netanyahu, who began a three-day visit to Washington on Monday, heads a coalition government dominated by pro-settler parties, including his own.

He has pledged not to curb Jewish housing in East Jerusalem, saying he enjoyed wide public support in Israel for that policy, followed by all Israeli governments since 1967.

Citing Biblical and historical links, Israel regards all of Jerusalem as its capital, a claim that has not won international recognition. Palestinians want East Jerusalem as the capital of the state they hope to create in the West Bank and Gaza Strip.

EXPANSION

Undeterred by turbulence in U.S.-Israeli relations, Israel earlier on Wednesday confirmed plans for a further expansion of the Jewish presence in East Jerusalem, with more building approved.

Gibbs said U.S. officials were seeking clarification after a Jerusalem city official, in a move that angered Palestinians, said final approval was given to develop a flashpoint neighborhood from which Palestinians were evicted last year.

U.S. and Israeli officials have sought to get relations back on track after a separate plan to build 1,600 homes for Jews in Ramat Shlomo, a settlement on West Bank land that Israel annexed to Jerusalem after the 1967 war, was announced two weeks ago during a visit by U.S. Vice President Joe Biden.

The housing dispute touched off the worst diplomatic rift between Washington and Israel since Obama took office last year.

Netanyahu said he was blindsided by bureaucrats and Israeli officials pointed to what they described as the difficulty of monitoring all of the local-level planning and approval stages of settlement projects in Jerusalem.

In a sign of lingering tensions, the Obama administration withheld from Netanyahu some of the usual trappings of a White House visit on Tuesday. Press coverage of the Oval Office talks was barred, and the leaders made no public statements afterward.

As part of the housing project that made headlines on Wednesday, 20 units are due to be built at the site of a defunct hotel in the Sheikh Jarrah neighborhood of East Jerusalem, an area where a U.S. millionaire has been buying property for settlers.

Nir Hefez, a spokesman for Netanyahu, said in a statement the decision to issue building permits was first made last year and that "Jews and Arabs can buy and sell freely private property and homes in all the city."

Netanyahu excluded occupied area in and around Jerusalem in a 10-month moratorium he announced in November in new housing starts in West Bank settlements. Palestinian President Mahmoud Abbas said the partial freeze was insufficient.

(Additional reporting by Allyn Fisher-Ilan in Jerusalem, Souhail Karam in Riyadh and Patrick Worsnip at the United Nations; Editing by David Storey)