In negotiations brokered by US Secretary of State Hillary Clinton, Israeli Prime Minister Benjamin Netanyahu and Palestinian president Mahmud Abbas were having a "serious and substantive" discussion, US envoy George Mitchell said.

The three met in Jerusalem after similar discussions in Egypt on Tuesday, which also focused on the core issues of the conflict as well as the expiry of a partial settlement moratorium at the end of this month.

"We continue to, in our efforts, to make progress in that regard and believe that we are doing so," Mitchell told reporters when asked about the issue of settlements, but he did not elaborate.

Abbas has warned that if the partial settlement freeze is not extended he will walk out of the negotiations, which were relaunched earlier this month after a 20-month hiatus.

Netanyahu has refused to renew the moratorium, which concludes at the end of the month, but hinted he would rein in settlement construction after US President Barack Obama urged him to renew the restrictions.

And a senior Palestinian official who asked not to be named said Netanyahu told Abbas Wednesday that settlements "will continue," causing Abbas to respond: "If settlement construction continues, I will stop negotiations."

Mitchell said the two leaders again tackled the issues at the heart of their decades-old conflict: Israel's security, the borders of a future Palestinian state, the fate of Palestinian refugees and the status of Jerusalem.

"The two leaders are not leaving the tough issues to the end of the process," Mitchell told reporters as Netanyahu and Abbas held hours of talks at the prime minister's residence.

"They are tackling up front the issues that are at the center of the Israeli-Palestinian conflict," he said.

"We take this as a strong indicator that peace is possible and of their desire to conclude an agreement," he added.

Clinton expressed a similar view after a morning meeting with Israeli President Shimon Peres.

"I believe they are serious about reaching an agreement.... This is the time and these are the leaders, and the United States will stand by them as they make difficult decisions," the chief US diplomat said.

In opening the three-way meeting, Netanyahu said: "It's a lot of work. I'm glad to have the opportunity to welcome President Abbas and Secretary Clinton here pursuing peace, and I think we should get on with it."

Throughout the day, Clinton held a series of closed-door meetings with senior officials including Israeli Foreign Minister Avigdor Lieberman, who strongly opposes any continuation of the settlement freeze, Defence Minister Ehud Barak and Palestinian prime minister Salam Fayyad.

Following the Jerusalem talks, Mitchell said he will fly to Syria for a meeting Thursday with President Bashar al-Assad aimed at reviving Syrian-Israeli peace talks.

Mitchell also said the two sides agreed Wednesday to have their negotiators meet again next week to pave the way for another meeting of the leaders.

Hours after Clinton arrived in Israel late on Tuesday, Palestinian militants fired a rocket at the southern port city of Ashkelon, followed by mortar fire. The attacks, which caused no casualties, were claimed by the Popular Resistance Committees, a small militant group opposed to the talks.

In response, the Israeli air force bombed targets in southern Gaza, killing one Palestinian and wounding another two.

The violence underscored the potential for an explosive confrontation with Hamas, the Islamist rulers of Gaza who vehemently oppose the peace talks.

Hamas was the target of Israel's devastating 22-day offensive over the Gaza Strip in December 2008 and January 2009 that cost the lives of 1,400 Palestinians and 13 Israelis.

earlier related report
Clinton in Jerusalem to tackle settlements deadlock
Jerusalem (AFP) Sept 15, 2010 - US Secretary of State Hillary Clinton said Israeli and Palestinian leaders were "serious" about peace ahead of a meeting Wednesday expected to address a lingering deadlock over Jewish settlements.

The three were to meet in the early evening a day after holding hours of discussions in Egypt which focused on the core issues of the conflict as well as the expiry of a partial settlement moratorium later this month.

"They are getting down to business and they have begun to grapple with the core issues that can only be resolved with face-to-face negotiations," Clinton told reporters after meeting Israeli President Shimon Peres.

"I believe they are serious about reaching an agreement... This is the time and these are the leaders, and the United States will stand by them as they make difficult decisions."

Palestinian president Mahmud Abbas has warned that if the moratorium is not extended, he will walk out of the negotiations, which were relaunched earlier this month after a 20-month hiatus.

Israeli Prime Minister Benjamin Netanyahu has refused to renew the moratorium but hinted he would rein in settlement construction after US President Barack Obama said he had urged the premier to renew the restrictions.

Clinton was to hold a series of talks ahead of the three-way meeting at 1500 GMT, including with Israel's tough-talking foreign minister Avigdor Lieberman, who strongly opposes any continuation of the settlement freeze.

The US secretary of state met President Shimon Peres early on Wednesday ahead of talks with Defence Minister Ehud Barak and Palestinian prime minister Salam Fayyad.

Shortly after Clinton landed in Israel late on Tuesday, Palestinian militants in Gaza fired a rocket and two mortar rounds into southern Israel, in what has become a near daily occurrence over the past week.

No one was wounded, but the attacks underscored the potential for a violent confrontation with Hamas, the Islamist rulers of Gaza, who are vehemently opposed to the renewed peace talks.

US envoy George Mitchell said on Tuesday that the two sides had begun a "serious discussion on core issues" at the talks in Egypt.

These include Israel's security, the borders of a future Palestinian state, the fate of Palestinian refugees and the status of Jerusalem.

But with only two weeks until the end of the freeze, the standoff over Israeli settlement building loomed large over Wednesday's agenda.

In a sign of the seriousness of the efforts to reach some kind of compromise, Netanyahu was expected to travel to Washington at the weekend for another round of talks with US President Barack Obama, Israeli media reported.

The reports were not confirmed by officials in Netanyahu's office.

Little visible progress was made on the settlement issue on Tuesday, with US envoy George Mitchell telling reporters only that "we believe that we are moving in the right direction overall."

Tuesday's talks were believed to have centred on the agenda for the negotiations. Netanyahu reportedly wants to focus on future security arrangements and secure Palestinian recognition of Israel as a Jewish state.

But the Palestinians want to discuss the core issues and define the borders of their future state, which could neutralise the settlements issue by demarcating where Israel can build.

Israeli government spokesman Mark Regev said Netanyahu was seeking to quickly negotiate an agreement that would be implemented over a long period.

Following the Jerusalem talks, Mitchell is expected to fly to Syria for a meeting with President Bashar al-Assad on Thursday, the US embassy in Damascus said.

Mitchell's visit is aimed at reviving Syria's talks with Israel, a senior US official told reporters on condition of anonymity.

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