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* Obama meets with Jewish-American leaders
* U.S., Israel differ on issue of Jewish settlements
(Adds Orthodox Union spokesman, paragraph 13)
WASHINGTON, July 13 (Reuters) - U.S. President Barack Obama indicated to Jewish-American leaders on Monday that the United States and Israel are making progress in bridging their differences on the issue of Jewish settlements.
Obama and Israeli Prime Minister Benjamin Netanyahu have differed sharply on Israeli settlements on the occupied West Bank. The United States wants a complete halt to settlement construction, a demand that has opened the most serious rift in U.S.-Israeli relations in a decade.
Israel has raised the possibility it might temporarily refrain from starting new building projects -- while continuing many under way -- in return for steps toward a regional peace agreement, including progress on Arab states normalizing relations with Israel.
U.S. envoy George Mitchell and Israeli Defense Minister Ehud Barak have conducted a series of talks on the issue.
Obama, White House Chief of Staff Rahm Emanuel and political adviser David Axelrod sat down with 16 Jewish-American leaders to discuss the Middle East and other issues.
"He (Obama) said that there is more progress than appears in the negotiations and spoke quite positively of the tracks between Mitchell and Barak and between the two administrations," said one participant, Malcolm Hoenlein, executive vice chairman of the Conference of Presidents of Major American Jewish Organizations.
One major obstacle has been Israel's insistence on allowing some "natural growth" of existing settlements.
Hoenlein said Obama indicated that "there might be some opening for an understanding between the two parties. I don't know what the understanding is."
Jeremy Ben-Ami, executive director of J Street, a pro-Israel lobby group in Washington, said Obama stressed that further expansion of settlements was not in the interest of the United States or Israel.
"The president said that the gaps are narrowing and he did allude to progress and his hope that an agreement would be reached. He definitely alluded to that," Ben-Ami said.
He said members of the group urged Obama to visit Israel.
Rabbi Steven Wernick, executive vice president of the United Synagogue of Conservative Judaism, said Obama stressed that he was also pressing the Palestinians to take steps necessary for peace.
A spokesman for Stephen Savitsky, president of the Orthodox Union, said there was concern about what appeared to be one-sided pressure on Israel. The spokesman said Obama indicated that he intends in coming weeks to make more public what is being done to nudge the Palestinians as well.
A White House statement said Obama "reiterated his unshakable commitment to Israel's security, and reiterated his commitment to working to achieve Middle East peace." (Reporting by David Alexander and Steve Holland, editing by Vicki Allen)