In a joint statement, the hawkish premier and US Middle East envoy George Mitchell said Israeli and US officials will meet again next week in the United States to pursue efforts to revive the moribund peace process.

The sides "agreed on the importance of restarting meaningful negotiations between Israelis and Palestinians and working toward a comprehensive peace."

"All sides need to take concrete steps toward peace," it added, avoiding however any direct reference to Washington's demand that Israel freeze all settlement construction in the occupied West Bank and east Jerusalem ahead of the renewal of peace talks.

The statement was issued at the end of the premier's visit to London, during which Netanyahu also met British Prime Minister Gordon Brown, and shortly before the Israeli leader left for Germany, where he will meet Chancellor Angela Merkel on Thursday.

In Washington, a State Department official, who requested anonymity, said next week's meeting would be between Mitchell and Israeli Defence Minister Ehud Barak, "quite likely" in New York, where the US envoy lives.

Speaking to reporters after arriving in Berlin, Netanyahu said that "there are still a number of issues that haven't been finalised in our talks with the United States... there has been certain progress but there is still work to be done."

Merkel was also set to press Netanyahu on settlements.

"The German government believes that no further settlements should be built in the occupied territories," said a spokesman in Berlin, Netanyahu's second and last stop in a four-day European trip.

At the start of the talks with Mitchell -- renowned for his role in Northern Ireland's peace process -- Netanyahu said he hoped "we will shortly be able to resume normal talks" with the Palestinians, according to his spokesman.

Netanyahu has rejected a total freeze, insisting on the need to guarantee "normal life" in settlements which are home to 500,000 Israelis.

The Palestinians today condition the return to the negotiating table on a full Israeli construction freeze in occupied territory where they wish to build their future state.

With the international community backing the US demand, the Israeli prime minister finds himself trying to placate intense diplomatic pressure while keeping together his right-leaning coalition government.

Netanyahu has repeatedly insisted in recent days that the heart of the decades-old conflict was not the settlements, but rather the Palestinian refusal to recognise Israel as a Jewish state.

"The core issue is for them to recognise Israel as the state of the Jewish people. This is what started the conflict, what stokes it and what will end it," he said.

Israel and US officials are eyeing a three-way summit between Obama, Netanyahu and Palestinian president Mahmud Abbas next month on the sidelines of the UN General Assembly to signal the relaunching of peace talks.

First launched in 1993, the talks were halted last December after Israel launched a military offensive in the Hamas-ruled Gaza Strip.

The Guardian newspaper in London reported Wednesday, however, that Israel was nearing an agreement on a partial settlement freeze in exchange for tougher international sanctions against Iran over its controversial nuclear programme.

Mitchell is trying to get Arab states to make gestures towards Israel.

According to officials, Netanyahu wants Saudi Arabia to open its air space to Israeli aircraft and to engage in low-level diplomatic ties.

"The Saudis joining the circle of peace would help a lot strengthening peace," Netanyahu told reporters.

Mideast arms race defies economic slowdown
Amman, Jordan (UPI) Aug 27 - With Saudi Arabia spearheading the arms race in the Middle East, defense spending in the region will exceed $100 billion by 2014, according to a study released by Frost & Sullivan.

"Saudi Arabia, the United Arab Emirates and Israel are poised to be the region's four biggest spenders on defense," the report said.

Last year, the U.A.E. poured some $4 billion into its military, with Israel paying around $13 billion.

Now, the report says, Saudi Arabia looked set to pay out at least $36 billion annually over the next five years.

"The ratio of their defense spending to that of their total GDP is the highest in the world," the report notes, stressing that the ratio was unaffected by the global economic slowdown and fluctuating oil prices.

"The financial muscle of countries like Saudi Arabia and the UAE is enabling them to keep spending a huge chunk of their GDP on defense," Frost & Sullivan analysts reported.

Globally the Middle East is forecast to account for 11 percent of all arms spending by 2014.

The appetite has been so intense that Bahrain and Jordan have requested permission from the United States to buy advanced air-to-air missiles in deals estimated to top $200 million.

Earlier this month the Defense Security Cooperation Agency, a branch of the U.S. Department of Defense, published relevant details of the deals on its Web site.

According to the details, Jordan is eyeing 85 AIM-120C-7 advanced medium-range air-to-air missiles and six 120 C captive air training missiles in a deal estimate at around $130 million.

Bahrain, is also considering the purchase of 25 AIM-120C-7 missiles estimated at $4 million.

The DSCA said the purchases "would not alter the military balance in the region."

While the deals have yet to be concluded, the main beneficiaries of Middle East arms spending may include global arms suppliers, including Russia, staking out new territories as the U.S. and European markets have become saturated, analysts suggested.

"It will be major countries … like Russia that benefit," said Gautam Ganapathy, lead author of the report.

The Middle East military market also holds promise of political gains, as defense sales can forge or buttress new alliances and increase regional influence.

"Russia, for example, might want to sell its equipment through government-owned firms, to enable the government to win financial and diplomatic gains," said Balaji Srimoolanathan, program manager for aerospace and defense at Frost & Sullivan. "It buys influence in political deals."

What has triggered the spending spree?

The report cites external and internal security threats, with a potential nuclear Iran topping the list.

"The high presence of non-state actors who have a fundamental and religious agenda (means) internal security has become one of the top priorities for countries in the Middle East," the report said.

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