WASHINGTON (Reuters) - President Barack Obama on Sunday eased Israeli anger over his new Middle East peace proposals when he made clear that the Jewish state would likely be able to negotiate keeping some settlements in any final deal with the Palestinians.
Obama repeated his view that long-stalled peace talks should start on the basis of the Israel's 1967 borders, an assertion that had infuriated Israeli leaders, exposed a rift between the two allies and raised further doubts about peace prospects.
But Obama's speech to Washington's most powerful pro-Israel lobbying group on Sunday seemed to soothe some tensions over Obama's endorsement three days earlier of a longstanding Palestinian demand on the borders of their future state.
Obama stressed that he expected the two sides to eventually reach an accord that included land swaps that would take into account the "new demographic realities on the ground," signaling that Israel should be allowed to keep some Jewish settlements built on occupied land.
The speech to Israel's staunchest U.S. supporters followed a testy encounter at the White House on Friday. Prime Minister Benjamin Netanyahu stunned his hosts by warning Obama against seeking peace "based on illusions" as he vowed Israel would never pull back to old borders he regarded as "indefensible."
But the right-wing Israeli leader quickly expressed his appreciation for Obama's remarks on Sunday, saying in a statement, "I am determined to work together with President Obama to find ways to resume the peace negotiations."
It could still take some time, however, for Obama and Netanyahu to overcome the latest strains in an already-fraught relationship that some analysts say is just as much a hindrance to reviving the moribund peace process as policy differences.
Netanyahu resisted offering any concessions in his Oval Office talks on Friday.
Obama's speech to the American Israel Public Affairs Committee (AIPAC) also served as a reminder his peace formula could cost him support among Jewish and pro-Israel voters and donors as he runs for re-election in 2012. Some prospective Republican presidential challengers have already accused him of betraying Israel, Washington's closest ally in the region.
"Even while we may at times disagree, as friends sometimes will, the bonds between the United States and Israel are unbreakable, and the commitment of the United States to the security of Israel is ironclad," Obama said to loud applause.
But Obama sometimes met stony silence from the AIPAC audience and at one point drew a smattering of boos.
Israeli officials were pleased, however, to hear Obama again reject a Palestinian plan to seek U.N. recognition of statehood in September and condemn a recent reconciliation deal between the Palestinian Authority and Hamas Islamists. But he also pressed Israel to "make the hard choices" for peace.
An aide to Palestinian President Mahmoud Abbas said: "We appreciate President Obama's stated position regarding a state on the 1967 borders, it is a step in the right direction."
On Sunday, Obama reiterated the "principles" he outlined on Thursday in a speech on Middle East upheaval, but introduced new phrasing that assuaged some of Netanyahu's concerns.
At issue is Obama's embrace of a long-sought goal by the Palestinians: that the state they seek in the occupied West Bank and Gaza Strip should largely be drawn along lines that existed before the 1967 war in which Israel captured those territories and East Jerusalem.
The proposal would call for negotiated land swaps for Israel to retain some large settlements in the West Bank.
Obama chided those who he said had "misrepresented" his position, a slap at Netanyahu, who had seized on the notion that he was being asked to return to 1967 lines while ignoring the president's stipulation there would be land exchanges.
"By definition, it means that the parties themselves - Israelis and Palestinians -- will negotiate a border that is different than the one that existed on June 4, 1967. That's what mutually agreed upon swaps means," Obama said.
"It allows the parties themselves to account for the changes that have taken place over the last forty-four years. ... to take account of those changes including the new demographic realities on the ground."
Obama's new wording was more in line with guarantees by former President George W. Bush in 2004 saying it was "unrealistic" for Israel to return to old borders and suggesting it may keep settlement blocs under any peace pact.
A senior U.S. official insisted however, that even though "people are trying to suggest that he felt he had to clarify something he said on Thursday, he did no such thing."
Despite that, Obama's stress on 1967 borders put the United States formally on record as endorsing the old boundaries as a starting point, something it had only embraced privately.
Obama's aim was to draw Palestinians back to the table and head off their U.N. statehood drive, but the Palestinians signaled they would not be deterred. Obama, leaving on a European tour later on Sunday, planned to try to convince European leaders not to support a unilateral statehood bid.
U.S.-brokered talks collapsed late last year when Netanyahu refused to extend a moratorium on settlement building in the West Bank and the Palestinians walked away.
Netanyahu is expected to be feted when he addresses AIPAC on Monday and then speaks to the U.S. Congress on Tuesday where he will have a chance to rally support for his stance.
While Obama won the Jewish vote overwhelmingly in 2008, some prominent Jewish Americans were rethinking their support for his re-election after this week's events.
Some Israelis have never felt entirely comfortable with Obama, unnerved by his early attempts to reach out to Iran and his support for Arab revolutions that have unsettled Israel.
Additional reporting by Jeffrey Heller and Jasmin Melvin; Editing by Jackie Frank