* Israel mulls limited settlement construction freeze
* Barak to hold talks in U.S. with Middle East envoy
* Settlement issue key to resumption of peace talks
JERUSALEM, June 28 (Reuters) - Israeli Defence Minister Ehud Barak left open the possibility on Sunday of a limited freeze on building in Jewish settlements in the occupied West Bank.
In comments to reporters, Barak stopped short of denying a report in Israel's biggest newspaper, Yedioth Ahronoth, that he would propose a three-month halt to construction starts in settlements but allow current building work to continue.
"The matter mentioned in the headlines has not been finalised," Barak told reporters ahead of talks this week with U.S. Middle East envoy George Mitchell in the United States.
"The issue of the settlements, as part of a broad range of issues, is part of our dialogue with the Americans," Barak said.
An Israeli official called the report "speculative". Other officials said in any case, Prime Minister Benjamin Netanyahu's government had not issued any tenders for new construction in West Bank settlements since taking office in March.
U.S. President Barack Obama, in a rare rift between Israel and the United States, is pushing for a building freeze in a bid to spur the resumption of Israeli-Palestinian peace talks.
But U.S. officials said Washington was considering making allowances for some structures nearing completion.
Yedioth Ahronoth reported that Barak would propose that a three-month moratorium would not cover some 2,000 buildings under construction in West Bank enclaves. Work on homes for Jews in Arab East Jerusalem also would continue.
"I spoke with the minister of defence and he said very clearly that there was no idea to freeze all building in the settlements," cabinet minister Gilad Erdan told reporters.
Palestinian President Mahmoud Abbas has said U.S.-backed negotiations with Israel could not resume until all settlement construction ceased.
Netanyahu has publicly rejected any restrictions on building Jewish homes within the Israeli-designated municipal boundaries of Jerusalem, which include Arab East Jerusalem and parts of the West Bank, territory Israel captured in a 1967 war.
Some 500,000 Israelis live in the West Bank and East Jerusalem. Palestinians say Jewish settlement on occupied land, deemed illegal by the World Court, could prevent them from establishing a viable state.
Israel has sought to ease tensions over settlements by committing to remove more West Bank roadblocks and settler outposts built without Israeli government permission. (Additional reporting by Adam Entous; Editing by Louise Ireland)
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