Netanyahu defies Obama call for settlement freeze

* Netanyahu sounds defiant note before Obama speech

* Jewish settlers torch West Bank fields

* Israel weighs easing Gaza blockade

* Obama: Israel obligated to freeze settlements

(Adds Obama comments on settlements)

By Jeffrey Heller and Adam Entous

JERUSALEM, June 1 (Reuters) - Israeli Prime Minister Benjamin Netanyahu, defying U.S. President Barack Obama's call for a settlement freeze, said on Monday Israel would continue to build in existing Jewish enclaves in occupied territory.

"Freezing life would not be reasonable," Netanyahu told lawmakers.

But in an apparent gesture to Obama, who has sought to revive stalled peace talks and plans to address Muslims from Egypt on Thursday, Israeli officials said Netanyahu might ease Israel's crippling blockade of the Hamas-ruled Gaza Strip.

In Washington, Obama said he believed a full settlement freeze was part of the steps both Israel and Palestinians have to take to achieve peace.

"I've said very clearly to the Israelis both privately and publicly that a freeze on settlements, including natural growth, is part of those obligations," Obama told NPR News.

"I've said to the Palestinians that their continued progress on security and ending the incitement that, I think, understandably makes the Israelis so concerned, that ... those obligations have to be met," Obama said.

In a mark of passions mounting in the West Bank, Jewish settlers, enraged at troops' removal of a hilltop outpost, set fire to Palestinian fields and pelted motorists with rocks.

Netanyahu's pleas that settlement cannot be fully halted seem to be landing on stony ground in Washington under a new administration keen for Arab support. Diplomats say a range of possible measures are being reviewed by the United States and European Union to put pressure on their Israeli ally.

Talk of such sanctions prompted one senior Israeli official to complain: "The Netanyahu government is acting the same as its predecessors. The one who has changed policy is the American administration. The new administration is trying to get out of understandings achieved under the Bush administration."

Obama, who has promised to reengage in peace diplomacy after relatively detached approach under his predecessor George W. Bush, seemed to nudge Netanyahu again on Monday.

Asked about the Muslim world's perception that Washington is biased in favor of Israel, Obama told NPR the United States has a "special relationship" with the Jewish state, which he called a "stalwart ally."

But he added, "There have been times where we are not as honest as we should be (with Israel) about the fact that the current direction, the current trajectory in the region is profoundly negative, not only for Israeli interests but for American interests. And that's part of a new dialogue that I'd like to see encouraged ..."

Speaking to a parliamentary committee on Monday, Netanyahu called for "reason and logic" in dealing with settlements in the West Bank, territory Israel captured in a 1967 war.

Obama, in office for just over four months to Netanyahu's two, has called for a full settlement freeze under a 2003 peace "road map." His secretary of state Hillary Clinton said that included halting building in existing settlements.

Obama said talks between the United States and Israel on the issue were still in the early stages and he expected the two sides to have "a series of conversations."


The right-wing coalition government has said it will remove unauthorised "outposts," mostly small hilltop camps, that Israel itself has not approved. The World Court has deemed all settlements, large and small, illegal.

In the West Bank, settlers set fire to Palestinian fields and scuffled with Israeli security forces who removed three caravans at one outpost near Nablus on Monday.

Half a million Jews live in settlement blocs built in the West Bank and Arab East Jerusalem -- areas where, with the Gaza Strip, Palestinians want to establish a state.

Israeli and Western officials said Netanyahu was considering a U.N. proposal to ease Israel's blockade of Gaza, to allow in some materials for rebuilding areas devastated by a three-week Israeli offensive that ended in mid-January.

Israel, which pulled settlers out of Gaza in 2005, has long restricted entry of goods into the enclave and tightened its blockade when it was taken over by Hamas Islamists who defeated forces loyal to Palestinian President Mahmoud Abbas in 2007.

Israeli officials said Netanyahu was now reassessing whether the embargo that has forced Gaza's 1.5 million residents to rely for basic goods on smuggling tunnels from Egypt, which Hamas controls, was meeting Israel's intended goal of weakening the Islamists, who have long fired rockets into southern Israel.

Foreign governments have been urging Israel to allow in more supplies, especially concrete and steel for rebuilding.

Among measures Washington could take to press Netanyahu over settlements, Western diplomats in the Middle East listed public rebukes from Obama, coordinated with other major powers. The New York Times quoted U.S. officials saying the United States could withhold its usual veto on U.N. resolutions critical of Israel.

Among other pressure points, Washington could review loan guarantees to Israel, diplomats said, or share and coordinate with less alacrity on security matters, while the European Union could get tough on trade terms for produce from settlements.

In Gaza, a team of U.N. human rights investigators headed by South African jurist Richard Goldstone began work to try to determine whether war crimes were committed during the war.

International groups had urged a credible probe of the conduct of Israeli troops, including the firing of artillery shells containing white phosphorus which can cause severe burns. Israel says an internal probe by its armed forces last month found no evidence of serious misconduct by its troops.

Palestinians say 1,417 people including 926 civilians were killed. Israel lost 10 soldiers and three civilians and puts the Palestinian toll at 1,166, most of them fighters.