Pressure has built on the European Union to flex muscle after Israel refused to extend a moratorium on settlements, with 26 former European leaders last week demanding sanctions, and Argentina and Uruguay joining Brazil in recognising an independent Palestinian state.

Palestinian president Mahmud Abbas on Monday urged the bloc's foreign policy chief Catherine Ashton in a phone conversation "to take a step towards recognition of the state of Palestine based on the 1967 borders," chief Palestinian negotiator Saeb Erakat told AFP.

And in Israeli media, even its closest EU ally Germany was reported Monday to be urging the recognition of a Palestinian state -- a report later described as "simply false" by Berlin.

"There is growing frustration with Israel after its refusal to commit to a new settlements freeze," a European diplomat told AFP as negotiators quibbled and clashed over a joint EU stand.

But after long and prickly negotiations, foreign ministers meeting in Brussels adopted a statement that falls short of ultimatums and breaks little new ground.

Going into the talks, Cyprus Foreign Minister Markos Kyprianou said the recognition of a Palestinian state had "always been on the table. But at this stage it's too early."

German Foreign Minister Guido Westerwelle said it was vital to avoid action that could compromise Israeli-Palestinian talks, "including unilateral moves".

The EU statement expresses "regret" at Israel's rejection of a new freeze, describing settlements as "illegal" and "an obstacle to peace."

It underlines EU support for "a negotiated solution" between the two sides "within the 12 months set by the Quartet" of international mediators.

It also welcomes a recent World Bank assessment that the Palestinian Authority "is well positioned for the establishment of a State at any point in the near future" and goes on to say that the EU "reiterates its readiness, when appropriate, to recognise a Palestinian state."

The EU will not recognise changes to pre-1967 borders, including with regard to Jerusalem, other than agreed by the parties.

"This could include territorial swaps," it says, without further comment in what a diplomat said was the first such reference by the EU.

It also demands that a way be found to resolve the status of Jerusalem "as the future capital of two states" and calls for a just solution to the refugee problem.

Turning to Israel's blockade of Gaza, it calls for massive and immediate efforts to help rebuild and revive the economy of the territory run by the radical Hamas movement.

"We are faced with a completely new ball game now that the negotiations in essence have slowed down because of the continuation of building settlements," said Finland's Foreign Minister Alexander Stubb.

But asked whether this should mean the recognition of a Palestinian state, he said: "I would not like to go there yet. I think the most important thing is to keep the peace process going."

In the letter to Ashton released last week, 26 former EU leaders, including her predecessor Javier Solana, urged her to threaten Israel with sanctions for failing to respect the freeze.

They also urged an April 2011 ultimatum for Israel to fall in line or see peace efforts referred back to the international community.

But diplomatic sources said EU member states remained divided between moderates and those who wanted to stiffen pressure on Israel, including Germany.

earlier related report
US envoy returns to grasp the nettle of Mideast peace
Jerusalem (AFP) Dec 13, 2010 - Israel on Monday welcomed a return to indirect peace talks as a US Middle East envoy arrived and the Palestinians called for a meeting of the Mideast Quartet in a bid to save negotiations.

As Washington's Middle East envoy George Mitchell arrived for talks with Israel's Benjamin Netanyahu and Palestinian president Mahmud Abbas, EU foreign ministers reaffirmed their commitment to two states for two peoples within the framework of a "negotiated solution."

Before meeting Mitchell, the Israeli premier expressed relief that the focus had been taken off Israeli settlement activity and placed firmly on the core issues -- which Washington now wants to address through indirect talks.

"The US has understood that what is important is to reach the real issues, including the core issues at the heart of the conflict between us and the Palestinians," Netanyahu said at a conference in Tel Aviv.

"When these gaps narrow, we will reach direct negotiations, with the aim of reaching a framework agreement for peace," he said.

Last week, Washington acknowledged it had failed to secure a new Israeli settlement freeze, effectively signalling the end of direct peace talks and a return to the "proximity" talks that began in May and were overseen by Mitchell.

Direct talks began on September 2, but stalled three weeks later with the end of an Israeli moratorium on settlement building. The Palestinians refused to talk while Israel continued building, but the ban was never renewed.

"We're going to work together to establish a new path to achieve a common goal, which is to get a framework agreement for peace that will ensure both peace and security," Netanyahu told reporters before meeting Mitchell.

"We hope our Palestinian neighbours will participate with us to achieve that in the coming months," he added.

Mitchell said only: "In their direct talks, both sides decided together to pursue a framework agreement that would establish the fundamental compromises on all permanent status issues, and pave the way for a final peace treaty."

The US envoy is due to meet Abbas on Tuesday. Before his arrival, the Palestinian leadership called for an urgent meeting of the Middle East Quartet, which comprises top diplomats from the United States, the European Union, Russia and the United Nations.

"The Palestinian leadership calls for a broad international effort to ensure the protection of the peace process, including an urgent meeting of the Quartet committee to lay the foundation for a renewal of the peace process," said Yasser Abed Rabbo, secretary general of the PLO's executive committee.

He also called for the Palestinian leadership to coordinate Arab and international efforts to get the negotiations back on track.

At the same time, Abbas called on the European Union to recognise a Palestinian state within the 1967 borders in a phone call with EU foreign policy chief Catherine Ashton.

"Ashton spoke today with president Abbas who called on the European Union to take a step towards recognition of the state of Palestine based on the 1967 borders," chief Palestinian negotiator Saeb Erakat told AFP.

"We hope that the European Union will take this step to maintain the requirements for the success of the peace process that were thwarted by Israel."

The Palestinians also sent a letter to EU foreign ministers meeting in Brussels, urging them to recognise a Palestinian state in order to "provide protection for the principle of two states as well as for the peace process," Erakat said.

European foreign ministers in Brussels on Monday reaffirmed a readiness to recognise a Palestinian state at an "appropriate" time, stopping short of outright recognition despite mounting pressure to break the impasse.

The EU ministers' statement expressed "regret" at Israel's rejection of a new freeze, describing settlements as "illegal" and "an obstacle to peace."

Over the past few weeks, Palestinian officials have been talking up their options if peace talks with Israel totally collapse -- one of which is seeking recognition for a unilateral declaration of statehood on the basis of the 1967 borders, including the West Bank, the Gaza Strip and occupied east Jerusalem.

After meeting Mitchell on Tuesday, Abbas will travel directly to Cairo to discuss the latest developments with Arab League diplomats.

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