JERUSALEM: Prime Minister Benjamin Netanyahu said on Sunday Israel could not extend a moratorium on housing construction in West Bank settlements but indicated he would limit the scope of future building, officials said.

Palestinian President Mahmoud Abbas has threatened to quit nascent peace talks with Israel if it resumes new construction in occupied territory once a 10-month moratorium Netanyahu imposed under U.S. pressure expires at the end of September.

Netanyahu, whose governing coalition is dominated by pro-settler parties, told Tony Blair, envoy of the Quartet of Middle East peace mediators, that Israel "could not extend the freeze," officials with knowledge of their discussions said.

But, according to one of the officials, he also said at Sunday`s meeting with Blair: "We will not build all of the tens of thousands of housing units in the planning pipeline."

Appearing to stake a middle ground, he added: "On the other hand, we will not freeze the lives of residents of Judea and Samaria (the West Bank) or freeze construction."

Some Israeli cabinet ministers have raised the prospect of limiting construction in settlements to those in areas of the occupied West Bank that Israel has said it intends to keep in a future deal to establish a Palestinian state.

It was not immediately clear whether such a blueprint could persuade Abbas, who agreed to direct negotiations with Israel only under heavy U.S. pressure, to stay the course in talks Washington hopes will result in framework deal within a year.

Netanyahu, who faces heavy pressure from settler groups not to curb construction, has signaled repeatedly that he had no mandate to extend formally a moratorium whose 10-month limit was enshrined in a government decision.

He has given no direct public response to remarks by U.S. President Barack Obama on Friday that continuing the partial freeze "makes sense."

PEACE TALKS

Netanyahu is due to hold another round of talks with Abbas in Egypt`s Red Sea resort of Sharm el-Sheikh on Tuesday.

U.S. Secretary of State Hillary Clinton, who oversaw the resumption of direct negotiations in Washington on Sept 2 after a 20-month hiatus, will take part in the session and visit Jerusalem on Wednesday.

"I hope that the Israeli government, given the choice between settlement and peace, will choose peace. They can`t have both," chief Palestinian negotiator Saeb Erekat told Reuters.

Speaking at the weekly meeting of his cabinet, Netanyahu focused in public remarks on his demand that Palestinians recognize Israel as the state of the Jewish people in any peace deal, a call Abbas has rejected.

"Unfortunately I am not yet hearing from the Palestinians the sentence `two states for two peoples`," Netanyahu said.

Palestinians have said they have already recognized the state of Israel in past declarations and in interim peace agreements that set the basis for establishing a state of their own in the West Bank and Gaza Strip.

"This recognition is done," Erekat said.

But explicit recognition of Israel as a Jewish state, Palestinian officials have said, could jeopardize the claims of Palestinian refugees, who fled or were forced to flee Arab-Israeli fighting, to a right of return to homes in what is now Israel.

BDST: 1136 HRS, SEP 13, 2010