* U.S. may now push simply to resume talks
* Abbas wants Netanyahu to pick up where Olmert left off
* Israel worries more about Iran, Abbas about Hamas
By Arshad Mohammed and Jeffrey Heller
NEW YORK, Sept 22 U.S. President Barack Obama may be laying the groundwork to abandon his quest for an immediate Israeli settlement freeze and instead try to get Israel and the Palestinians directly into peace negotiations.
Obama emerged from talks with Israeli and Palestinian officials on Tuesday without the orchestrated set of steps that he had hoped would allow him to announce a resumption of peace negotiations, which have been on ice since December.
Instead, he was reduced to stressing the urgency of ending the six-decade conflict and exhorting Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas to show "flexibility and common sense and sense of compromise."
The outcome, analysts said, suggested the limitations of trying to secure confidence-building steps in advance and may presage a drive to go directly to full-blown negotiations even though neither side yet seems ready for them.
"It's clearly a lost cause," Daniel Kurtzer, a retired U.S. diplomat who now teaches at Princeton University, said of Obama's effort to get Israel, the Palestinians and Arab states to make reciprocal gestures before the resumption of talks.
Washington wanted Israel to halt all building of Jewish settlements on the West Bank, which it has occupied since the 1967 Middle East War. It also wanted the Palestinians to do more to prevent violence against Israelis and Arab nations to take steps toward normalizing relations with the Jewish state.
None of these were in place as Obama met Netanyahu and Abbas first separately and then in a trilateral meeting, the highest-level talks between the two sides in nearly a year.
Both sides are at odds over a starting point for any future negotiations on core issues such as the borders and the future of Jerusalem and a Palestinian state.
Abbas insists Netanyahu, head of a right-leaning government, pick up where his more centrist predecessor, Ehud Olmert, who proposed significant territorial compromises, left off after a year of unsuccessful negotiations.
Netanyahu says he is not obligated by the position of the previous government and has resisted freezing settlements.
"They are trying to finesse settlements now," said Kurtzer, a former U.S. ambassador to Israel. "Having been unable to reach an agreement to freeze settlements in a meaningful way, they are going to leave it out there as a disagreement between us but not as a road block or an impediment to negotiations."
Israeli officials appeared delighted that Obama said only that Israel should "restrain" its construction of settlements on occupied land in the West Bank rather than tougher demands from U.S. officials that it freeze such building entirely.
"Ask the Americans," Netanyahu replied, when asked by reporters what Obama meant by restraint.
Middle East analysts also questioned whether Obama may now find himself in a familiar place for U.S. presidents -- wanting a peace agreement more than the Israelis or the Palestinians.
However, while noting that Obama had by no means achieved what he might have hoped for, analysts said they did not think he would be blamed much for this.
"By engaging from day one, you can actually go through some months of impasse and then pivot to bigger issues as the administration now appears to be doing," said Daniel Levy of the New America Foundation think tank in Washington.
'BACK TO SQUARE ONE'
In just one sentence at the briefing, Netanyahu made clear his top priority.
"The Iranian issue overshadows everything," he said.
Jon Alterman, director of the Middle East Program at the Center for Strategic and International Studies think tank in Washington, said Israel sees a nuclear-armed Iran as more of a threat to its existence than the Palestinians.
Abbas, he said, is more interested in reasserting control over the Gaza Strip, where the Islamist Hamas movement now holds sway.
"Each side does not think that now is the time to make serious compromises," Alterman said.
Elie Podeh, a professor in the department of Islamic and Middle Eastern Studies in the Hebrew University in Jerusalem, said "quite substantial progress" had been made toward a peace agreement during Olmert's tenure.
"Netanyahu has his own agenda and it's not a surprise he doesn't want to continue from where Olmert stopped," Podeh said. "It seems we are back to square one." (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to blogs.reuters.com/axismundi) (Additional reporting by Alastair Macdonald in Jerusalem; Editing by Bill Trott)