Washington meanwhile announced that US Secretary of State Hillary Clinton would travel to the region later this month for the first of twice-monthly meetings between Netanyahu and Palestinian president Mahmud Abbas.

And the Palestinians warned that failure to clinch an agreement would spell the end of Abbas's moderate, Western-backed Palestinian Authority and strengthen Islamists and other factions opposed to talks with Israel.

"We will need to think creatively, and in new ways, about how to resolve complex problems," Netanyahu told reporters at the start of Israel's weekly cabinet meeting.

"In order to reach practical solutions, we will need to think about new solutions to old problems," the right-winger said.

"To succeed, we will need to study the lessons of the 17-year effort at negotiations and to embrace original thinking, to think outside the box," he said, referring to the 1993 Palestinian autonomy accords.

Netanyahu insisted, however, that he was "willing to achieve an historic compromise with our Palestinian neighbours so long as it maintains the national interests of the state of Israel with security first and foremost."

The two sides relaunched direct peace talks at a Washington summit on Thursday after a 20-month hiatus, but the negotiations will face a major test later this month when an Israeli settlement moratorium expires.

The Palestinians have warned that if Israel does not renew the partial freeze on settlement construction in the occupied West Bank when it expires on September 26 the peace process will end.

Netanyahu, under pressure from right-wingers who dominate his ruling coalition to resume construction, has said settlements should be discussed alongside other core disputes that have bedeviled past attempts at peace, including the final status of Jerusalem and the fate of Palestinian refugees.

"It is almost impossible to do it" as it would cause a government crisis, Deputy Prime Minister Sylvan Shalom said of extending the construction freeze.

Asked about the risks to the peace talks of resuming construction in the occupied West Bank, Shalom told foreign journalists "the Palestinians would make a big mistake" of they quit the talks.

Netanyahu plans to hold twice-monthly talks with Abbas starting with a September 14-15 meeting in Egypt's Red Sea resort of Sharm el-Sheikh, which will be attended by Clinton.

After attending the talks in Sharm el-Sheikh she will head to Jerusalem for further discussions, a State Department official said in Washington.

"Secretary Clinton will be joined in these negotiations by Special Envoy for Middle East Peace Senator George Mitchell," the official added.

Meanwhile chief Palestinian negotiator Saeb Erakat warned that should the latest attempt to reach a peace settlement fail, the moderate Palestinian leadership would disintegrate.

"We hope to bring (about) a Palestinian state. If we fail to bring it now, then I think we'll go home," he told AFP on Sunday.

The collapse of the moderate Palestinian leadership would leave the Islamist Hamas movement, which is sworn to Israel's destruction, at the head of the national movement.

"If we have an agreement, (Hamas) will disappear, and if we don't have an agreement, then we will disappear," Erakat warned. "I really hope that we can make it, God willing."

But Israeli Foreign Minister Avigdor Lieberman said on Sunday he does not believe a deal can be clinched within a year or even "during the next generation."

"Abu Mazen (Abbas) will not sign a comprehensive agreement. That's why we should look for a long-term interim accord and concentrate on Israel's security," Lieberman said in remarks broadcast on Channel 2 television.

In any case, he added, "the signing of a peace agreement does not mean the end of the conflict and of mutual demands as well as the recognition of Israel as the national state of the Jewish people."

earlier related report
Second body recovered from Israeli strikes on Gaza: medics
Gaza City, Palestinian Territories (AFP) Sept 5, 2010 - The body of a second Palestinian killed in Israeli air strikes on southern Gaza was recovered on Sunday, according to Palestinian medics and witnesses.

The two Palestinians were killed and another three were wounded in the strikes carried out Saturday after a rocket attack from Gaza in the first exchange of fire since the relaunch of Middle East peace talks last week.

Two raids targeted smuggling tunnels along the border with Egypt, causing a tunnel to collapse on the two men, and a third struck a former base used by the militant Hamas movement, which has ruled Gaza since June 2007.

An Israeli military spokesman confirmed the three raids, saying that one was aimed at "a tunnel dug in the direction of Israeli territory" for attacks across the border.

The air strikes came after the firing of a makeshift rocket from Gaza into Israel by Palestinian militants on Saturday, which caused no casualties or damage, according to the Israeli military.

On Thursday, Palestinian president Mahmud Abbas and Israeli Prime Minister Benjamin Netanyahu relaunched direct peace talks in Washington following a 20-month hiatus.

Hamas has threatened to keep up its attacks on Israel after carrying out two shooting assaults against Israeli settlers in the occupied West Bank that killed four people ahead of the talks.

It did not claim the rocket attack, however, and has taken steps to halt such attacks by other militant factions since the end of a devastating Israeli offensive in the territory in December 2008 and January 2009.

Hamas and Abbas's secular Fatah movement have been fiercely divided since the Gaza takeover and the Islamist movement -- which is sworn to Israel's destruction -- has vehemently opposed the renewal of peace negotiations.

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