Dan Meridor, who is also Israel's minister for intelligence and nuclear affairs, told reporters he hoped the two sides could work out a compromise which would allow them to continue talking, despite the looming expiry of a freeze on new West Bank building.

Israel and the Palestinians began long-awaited direct peace talks on September 2, but the settlement freeze, which is due to run out by the end of the month, may well derail the negotiations.

Israel has refused to extend the partial 10-month ban, prompting Palestinian threats of a walkout if construction resumes.

Earlier on Monday, Palestinian president Mahmud Abbas told AFP en route to New York that he would not continue negotiations "for a single day more" if Israel resumed building on occupied Palestinian land.

Meridor, a member of Prime Minister Benjamin Netanyahu's inner cabinet who favours a resumption of building in settlement blocs likely to be kept by Israel in a final settlement, said the moratorium was a "test case" for both sides' ability to compromise.

"The first test for compromise on both sides is the moratorium. If they say no compromise, it's a bad sign," he told a news conference in Jerusalem.

"In order to succeed in direct negotiations both parties need to understand that none can come out of them with all that they wanted -- in other words the key concept is compromise," he said.

Meridor refused to be drawn on ways in which Israel could square the circle, putting the ball firmly in the Palestinians' court.

"If they don't reach a compromise on the end of the conflict, there won't be an end to the conflict," he said, stressing that if the talks do collapse, the outcome would be worse for the Palestinians than for Israel.

Israel's hawkish premier had taken several unprecedented decisions over the past 15 months -- endorsing, for the first time, a Palestinian state, and announcing the 10-month moratorium on new building in the West Bank, he said.

"We have made tough decisions. Now the ball is in the yard of the other side," he said. "They need to make a decision. Are they in for real negotiations or in for a blame game?"

Meanwhile, Israel's private Channel Two television reported on Monday that Netanyahu supports a draft law on a referendum on any peace agreement with the Palestinians.

It said he "totally" backed the draft bill put forward by Likud MP Ofir Akunis, one of his former spokesmen.

earlier related report
No Middle East peace talks scheduled for Obama this week
Washington (AFP) Sept 20, 2010 - President Barack Obama has no current plans for peace talks with Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmud Abbas in New York this week, the White House said Monday.

There had been some expectations that the action in the direct Israeli-Palestinian peace talks would shift to the sidelines of the UN General Assembly this week, as the end of an Israeli settlement moratorium looms.

But Ben Rhodes, a senior foreign policy advisor to Obama, said no talks were planned as of Monday.

"We don't have any currently planned. I would have to defer to the Israelis and the Palestinians about the schedule of their leaders," Rhodes, a deputy national security advisor, told reporters.

Netanyahu's office had said he has no plans to head to the United States this week, but Israeli President Shimon Peres and Defence Minister Ehud Barak are already in the country.

Peres is due to address the UN summit, and Barak is holding talks with US officials.

The deadline for the end of Israel's freeze on settlement construction is widely accepted as September 26, exactly 10 months and a day after the original cabinet decision.

But the Israeli military order regarding the moratorium states it will only close at midnight on September 30.

Abbas told AFP on Monday he will not take part in US-backed peace talks "for a single day" if Israel does not extend a freeze on settlement building at the month's end.

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