* Palestinians oppose any compromise on settlements
* Netanyahu renews call on Abbas to resume peace talks
(Adds Netanyahu remarks)
By Ali Sawafta
RAMALLAH, West Bank, July 12 (Reuters) - Palestinians reject any deal between Israel and the United States that would allow even limited Jewish settlement construction in the occupied West Bank, a top Palestinian negotiator said on Sunday.
"There are no middle-ground solutions for the settlement issue: either settlement activity stops or it doesn't stop," Saeb Erekat told Voice of Palestine radio.
Erekat said Palestinian President Mahmoud Abbas expressed that message in a letter on Saturday to U.S. President Barack Obama.
Erekat was responding to reports that Israel and the United States were discussing a compromise that would allow some building in existing settlements under what Israel terms "natural growth" to accommodate expanding families.
A U.S. official denied on Wednesday a report in the Israeli daily Maariv that the Obama administration agreed work could continue on 2,500 housing units whose construction had begun, despite its call for a total freeze to spur peace efforts.
The report followed talks in London last week between George Mitchell, Obama's special Middle East envoy, and Israeli Defence Minister Ehud Barak aimed at healing a rift over continued settlement activity.
The U.S. State Department said Mitchell was expected in the region "soon" for talks with Israeli and Palestinian officials.
Barak has been seeking a deal with the United States that would include initial steps by Arab states to normalise relations with Israel in return for limiting settlement activity.
Israeli Prime Minister Benjamin Netanyahu on Sunday renewed his call on Abbas to resume peace talks immediately.
"There is no reason for us not to meet anywhere in Israel and I suggest we meet ... to advance peace for the benefit of both our peoples," Netanyahu said during the weekly cabinet meeting, held in the southern city of Beersheba.
Palestinians have said they would not revive stalled peace talks with Israel unless its settlement activities stopped.
"If settlement continues Israel will be allowed to build one thousand units here and two thousand units there, which will lead Arabs and Palestinians to believe that the American administration is incapable of swaying Israel to halt its settlement activities," Erekat told the radio.
"The message is clear: settlements should stop immediately."
Some 500,000 Israelis live in the West Bank and Arab East Jerusalem, areas Israel captured in a 1967 war. Palestinians say Jewish settlements, deemed illegal by the World Court, would deny them a viable and contiguous state.
Western officials said the United States was moving in the direction of making allowances so Israel could finish off at least some existing projects which are close to completion or bound by private contracts that cannot be broken.
Israel estimates that 2,500 units are in the process of being built and cannot be stopped under Israeli law.
Netanyahu, under U.S. pressure, has pledged not to build new settlements in the West Bank. (Writing by Joseph Nasr, Editing by Richard Balmforth) (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to blogs.reuters.com/axismundi)