WASHINGTON (Reuters) - U.S. President Barack Obama and Israeli Prime Minister Benjamin Netanyahu sought on Tuesday to ease strained ties but their talks yielded no sign of a breakthrough in the stalled Middle East peace process.
The meeting, unusually low profile for a visiting Israeli leader, was held a day after Netanyahu struck a defiant note in the face of fresh 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 lingering tensions, the Obama administration withheld from Netanyahu some of the usual trappings of a White House visit. Press coverage of the Oval Office talks was barred, and the leaders made no public statements afterward.
"President Obama and the prime minister met privately for an hour and a half, the atmosphere was good," Netanyahu's spokesman Nir Chefetz said in a statement several hours after the meeting ended.
He said the two leaders' advisers "continued discussions on the ideas raised at the meeting" and would hold further talks on Wednesday.
During an unusually testy three-day stay in Washington, Netanyahu, under pressure from members of his right-leaning coalition, showed no intention of backing down on settlement construction on occupied land in and around Jerusalem.
His talks with Obama coincided with new reports in Israeli media that Israel's Jerusalem municipality had given final approval for a Jewish housing project announced last July.
Before seeing Obama, Netanyahu told U.S. lawmakers he feared peace talks, suspended since December 2008, 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 congressional leaders, according to his spokesman.
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 the settlement of Ramat Shlomo near East Jerusalem.
The announcement of the disputed housing project embarrassed Vice President Joe Biden during a visit to Israel this month and drew strong U.S. condemnation. Netanyahu insisted he had been blindsided by Israeli bureaucrats.
Shortly before Netanyahu met Obama, Israeli media reported that Israel's Jerusalem municipality gave final approval last Thursday to a separate plan to build 20 homes for Jews on the site of a defunct hotel in East Jerusalem.
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 evening after Obama signed a landmark U.S. healthcare reform bill. Netanyahu met Obama for about 90 minutes, a White House spokesman said. But he did not leave for two more hours, apparently after meeting Obama aides.
Israeli officials said Netanyahu planned to use his visit to discuss U.S.-led efforts to pressure Iran, the Jewish state's archfoe, over its nuclear program.
White House officials made no immediate comment on the talks. But the warm welcome Netanyahu received earlier on Capitol Hill underscored the political difficulties Obama faces in pressuring Israel for concessions.
Critics have said Obama, who promised at the start of his administration to make Middle East peacemaking a high priority, underestimated the obstacles.
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, said in 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, declaring in an address to the influential pro-Israel lobby AIPAC that "Jerusalem is not a settlement, it's our capital."
Additional reporting by Susan Cornwell in Washington and Allyn Fisher-Ilan in Jerusalem; editing by Mohammad Zargham