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Israel's leader faces U.S. pressure on settlements

* Israeli prime minister meets key U.S. lawmakers

* Netanyahu resists fresh pressure to freeze settlements

* Gates, Netanyahu discuss Iran at Pentagon (Adds Pentagon statement, paragraphs 13-16)

WASHINGTON, May 19 (Reuters) - Israeli Prime Minister Benjamin Netanyahu faced fresh pressure on Tuesday from the United States to freeze Jewish settlement activity that Palestinians see as an impediment to peace.

Netanyahu, on his first visit to Washington since taking over as prime minister less than two months ago, resisted the pressure. He also said Palestinians need to make concessions, and underscored Israeli worries about Iran.

Making the rounds on Capitol Hill, Netanyahu held talks with Massachusetts Democratic Senator John Kerry, chairman of the Senate Foreign Relations Committee, who raised the settlement issue.

"I emphasized to the prime minister the importance of moving forward, especially in respect to the settlement issue," Kerry said.

The message was the same from U.S. Secretary of State Hillary Clinton, who told reporters she played host to the Israeli leader at a Monday night dinner and stressed President Barack Obama's position that "he wants to see a stop to the settlements."

The United States and the European Union view all Jewish settlements in the West Bank as illegal under international law and obstacles to peace. Netanyahu, who heads a new right-leaning Israeli coalition, has resisted calls to freeze the expansion of Jewish settlements.

He told reporters that Israel is ready to resume the peace process and that the Palestinians "have to take concrete steps to improve relations with Israel."

Netanyahu, a familiar figure in Washington because of his prior stint as prime minister during an earlier, failed attempt to resolve the Arab-Israeli conflict, is eager to avoid alienating the United States, Israel's biggest ally.

But he also faces political pressure at home to resist making concessions to Palestinians who Israelis blame for violent attacks.

IRAN ON AGENDA

Netanyahu hoped to find a willing ear in Washington against Iran, who the United States suspects is attempting to develop a nuclear weapon despite Iranian denials.

"We face opportunities and challenges -- the challenges, the arming of Iran, the potential arming of Iran with nuclear weapons capabilities," Netanyahu said at a picture-taking session with House of Representatives Speaker Nancy Pelosi.

"That is a great danger to all of us, to Israel specifically, to the moderate Arab regimes, to America, especially if this regime were to arm itself -- arm terrorists with nuclear weapons -- the consequences could be unimaginable," he said.

Netanyahu also discussed Iran with Defense Secretary Robert Gates, Pentagon press secretary Geoff Morrell said.

"The Secretary reiterated President Obama's commitment to try to engage Iran and offer incentives to persuade them to change course in order to become a full-fledged member of the international community," Morrell said.

"However, should Iran rebuff the U.S. initiative, the Secretary told the Prime Minister there would be serious consequences, including much stronger international sanctions," Morrell said.

"The two men also discussed how we can further develop our cooperation on missile defense, stem the flow of arms into the Gaza Strip and expedite the training of Palestinian security forces in the West Bank."

Netanyahu's visit followed a report in the Times of London that CIA Director Leon Panetta had made a secret trip to Israel weeks ago and sought assurances from Netanyahu and Israeli Defense Minister Ehud Barak that their government would not attack Iran without alerting Washington.

Obama, who is trying to engage Iran diplomatically after President George W. Bush made little headway in getting Tehran to make nuclear concessions, has said he wants to see serious progress with Iran by the end of the year.

On relations between Israel and the Palestinians, Pelosi backed a two-state solution in which a Palestinian state exists alongside Israel, which Netanyahu has refused to accept.

"There have been previous agreements that talked about a two-state solution, but I emphasize the word solution. It must be a solution that provides for a democratic, Jewish state of Israel living side by side with her Palestinian neighbors," she said.

Obama met with Netanyahu on Monday and pressed for a two-state solution but failed to win a commitment from the Israeli prime minister to back Palestinian statehood. (Additional reporting by Deborah Charles and Andrew Gray, writing by Steve Holland, editing by Will Dunham)

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