* Leaders prepare for first direct talks in 20 months
* Fayyad looks for Israeli answers, says no time to waste
By Tom Perry
RAMALLAH, West Bank, Aug 30 (Reuters) - The Palestinian prime minister on Monday forecast a "moment of reckoning" in the coming weeks when the Israeli prime minister is forced to explain what kind of state he has in mind for the Palestinians.
The Palestinians are set to resume direct negotiations with Israel in Washington on Thursday. They will be the first direct talks in 20 months and are the result of painstaking U.S. diplomacy aimed at reviving the peace process.
Prime Minister Salam Fayyad has expressed doubt about whether Israeli Prime Minister Benjamin Netanyahu is ready to offer the Palestinians a state on terms they could accept.
Last year, Fayyad said Netanyahu appeared to have a "Mickey Mouse" state in mind for the Palestinians on lands occupied by Israel, using the Disney character’s name as slang for unimportant or trivial.
"What kind of state does Mr. Netanyahu have in mind when he says ‘Palestinian state’?" Fayyad, prime minister of the Ramallah-based Palestinian Authority led by President Mahmoud Abbas, said in a press briefing on Monday.
"I think this is a most fundamental question and I believe, without wishing to really prejudge what will happen in the next few days, the next few weeks, we are approaching that moment of reckoning," Fayyad said.
"Some questions really need to be answered," said Fayyad, unveiling the steps his administration plans to take over the next 12 months to complete a two-year plan aimed at building the institutions of a Palestinian state.
The Palestinians are seeking a state in the West Bank and the Gaza Strip with East Jerusalem as its capital.
Their credibility damaged by the failure of past talks, the Palestinians had sought a sense of the shape and size of the Palestinian state Netanyahu has in mind before agreeing to more negotiations.
They did not get their wish, which Netanyahu said amounted to preconditions. U.S. peace envoy George Mitchell said the parties would determine the terms of reference of the talks when they meet.
"There is not really a whole lot of time to waste," Fayyad said, warning of "adverse facts" created on the ground that will make the two-state solution "more and more difficult to implement".
Jewish settlement expansion on occupied land is one of the factors the Palestinians warn will render statehood impossible.
The Palestinians have threatened to pull out of the face-to-face negotiations unless Israel extends a moratorium on new housing starts in Jewish West Bank settlements past its expiration date of Sept. 26.
Netanyahu, who heads a government dominated by pro-settler parties including his own, has given no sign he will continue to curb construction of homes for Jews in the occupied West Bank. (Editing by Jon Hemming)