Meanwhile, US envoy George Mitchell met Lebanese President Michel Sleiman as part of Washington's target of forging a comprehensive Middle East peace.

"The prime minister has not changed his position on this issue, there is no question of extending the moratorium," a senior Israeli government official told AFP, asking not to be named.

The 10-month measure to curb construction of settler homes in the Israeli-occupied West Bank concludes at the end of this month.

The United Nations on Friday made a new call for an extension of the moratorium, highlighting the "renewed hope" for Middle East peace.

"We reaffirm the UN's position that settlements are illegal under international law," Robert Serry, the top UN Middle East peace envoy, told a Security Council meeting.

Israel's decision not to renew the moratorium, which does not cover annexed east Jerusalem, was taken this week by the Forum of Seven top cabinet ministers, according to the daily Israel Hayom, which is close to the government.

That decision was communicated to US Secretary of State Hillary Clinton, who was in the Middle East this week in a bid to push the peace process forward, the newspaper said.

The issue of settlements is among the thorniest in Middle East peace negotiations, with Israel and the Palestinians resuming direct talks this month after a 20-month hiatus.

The two sides remain deeply divided over the renewal of settlement construction, a senior Palestinian official said after Israeli Prime Minister Benjamin Netanyahu, Palestinian president Mahmud Abbas and Clinton met for two days of trilateral talks this week.

The official said the negotiations, held in Egypt and Jerusalem, had failed to resolve the row which threatens to derail the peace process.

Abbas told Netanyahu during the talks that he would walk out of the negotiations if Israel does not renew the moratorium, according to an aide.

In an effort to resolve the row, the Americans have suggested a three-month extension in which the two sides could agree on borders, which could bring a "final halt to settlement on the lands of the future Palestinian state," a Palestinian official said.

The official added that US negotiators wanted a complete halt to settlements while Israel was insisting on continuing to build in major settlement blocs it hopes to keep in any final peace accord.

Friday's killing of a local commander of the Ezzedine al Qassam Brigades, the armed wing of Hamas in the West Bank, highlighted the continuing tension in the region despite the renewed push for peace.

Israeli soldiers shot dead Iyad Shilbaya, 38, during a raid on the Nur Shams refugee camp in the northern West Bank.

"The assassination is a dangerous escalation that further weakens the credibility of an already shaky political process," Palestinian prime minister Salam Fayyad said in a statement.

Hamas, the Islamist movement that rules the Gaza Strip and is committed to the destruction of Israel, called Shilbaya "a martyr."

"The murder was the fruit of the negotiations," Hamas spokesman Sami Abu Zuhri said.

Meanwhile, US envoy Mitchell met the Lebanese president to brief him and other officials on the talks and also met UN peacekeepers stationed on the Israeli border.

Lebanon and neighbouring Syria are still technically at war with Israel, and Washington is hoping to convince both states to enter into negotiations with the Jewish state and to support the Israeli-Palestinian peace talks.

Saying the "alternative to peace is far worse," Mitchell said that "without Lebanon there will not be comprehensive peace in this region."

Israel fought a devastating war with Lebanon's Hezbollah in 2006, and has repeatedly accused the Shiite militant group of stockpiling weapons.

Mitchell said he had "assured Lebanese leaders of our full and active support for the complete implementation" of UN Security Council Resolution 1701, which ended the 2006 war and called for a southern Lebanon free of all weapons except those held by the Lebanese army and UN peacekeepers.

Mitchell travelled to Lebanon from neighbouring Syria.

In Damascus, he said a peace deal meant an "agreement between Israel and the Palestinians, between Israel and Syria and between Israel and Lebanon and the full normalisation of relations between Israel and its neighbours."

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