* Clinton to meet Egyptian president on Wednesday
* Israeli settlements offer does not go far enough - Clinton
* Arab League "disappointed" with U.S. on settlements
(Adds quotes from Clinton, State Department spokesman)
By Andrew Quinn and Christian Lowe
MARRAKESH, Morocco, Nov 2 Israel's offer to show restraint on settlements falls short of U.S. expectations, Secretary of State Hillary Clinton said on Monday in an effort to counter Arab accusations she had been too soft on Israel.
Clinton, meeting Arab foreign ministers in Morocco, tried to control the damage after failing to put more pressure on Israel publicly to freeze settlement expansion in the occupied West Bank when she met Prime Minister Benjamin Netanyahu.
She will travel from Morocco to Egypt for a meeting on Wednesday with Egyptian President Hosni Mubarak, a State Department spokesman said. Those talks are also likely to focus on the stalled Israeli-Palestinian peace process.
A State Department spokesman said Clinton had tried to explain to the Arab officials on Monday what Israel had put on the table, and to calm the situation down.
"We obviously were very conscious of the reaction to her appearance in Jerusalem," the spokesman said of Clinton's efforts with Arab leaders. "I would call it public diplomacy."
Arab League Secretary-General Amr Moussa said earlier on Monday he feared U.S. President Barack Obama's drive to restart Israeli-Palestinian peace talks could be heading for failure over the settlement issue.
Obama has eased U.S. pressure on Israel over settlements, calling for restraint in construction where he had earlier pushed for a freeze. The change has angered Palestinians who say it has killed any hope of reviving peace negotiations soon.
"The Israelis have responded to the call of the U.S., the Palestinians and the Arab world to stop settlement activity by expressing a willingness to restrain settlement activity," Clinton told reporters.
"This offer falls far short of what our preference would be but if it is acted upon it will be an unprecedented restriction on settlements and would have a significant and meaningful effect on restraining their growth."
Clinton also praised Palestinian President Mahmoud Abbas for "positive steps" towards talks, including improving security on the West Bank, and said Israel should reciprocate.
Clinton was in Morocco after a meeting with Netanyahu in Jerusalem at which she endorsed Israel's view that settlement expansion should not be a bar to resuming negotiations.
The Arab League chief said Arab states shared the Palestinian position that resuming negotiations was futile without a freeze on settlement expansion.
"I am telling you that all of us, including Saudi Arabia, including Egypt, are deeply disappointed ... with the results, with the fact that Israel can get away with anything without any firm stand that this cannot be done," Moussa told reporters.
Asked if Obama's initiative to restart the peace process had failed, he said: "I still wait until we have our meetings and decide what we are going to do. But failure is in the atmosphere all over."
After a bilateral meeting with Saudi Foreign Minister Prince Saud al-Faisal in Morocco as well as group meetings with Gulf Arab ministers and officials from Egypt, Jordan and Iraq on the sidelines of a conference, Clinton said many aspects of the peace talks issue had been discussed.
"Our conversation was very open," she said.
After Clinton's visit to Jerusalem, Palestinians accused the United States of "back-pedalling" on settlements and said a resumption of Israeli-Palestinian talks was not in sight.
Netanyahu has proposed limiting building for now to some 3,000 settler homes already approved by Israel in the West Bank. He does not regard building in occupied East Jerusalem, annexed in defiance of international opposition, as settlement.
Abbas faces intense domestic pressure from Hamas Islamists who control the Gaza Strip, and any compromise on settlements could hurt him politically in a run-up to Palestinian elections he has scheduled for Jan. 24. Hamas has rejected holding a vote. (Additional reporting by Tom Pfeiffer in Marrakesh; editing by Andrew Roche)