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By Jeffrey Heller and Alastair Macdonald
JERUSALEM (Reuters) - Israeli Prime Minister Benjamin Netanyahu ordered a 10-month freeze on some building in West Bank settlements Wednesday, pleasing the United States but Palestinians said it was not enough to restart peace talks.
Allies of Palestinian President Mahmoud Abbas, who is under pressure from U.S. President Barack Obama to drop a demand that an 11-month-old suspension of negotiations should end only if Israel stops construction on land it occupied in 1967, said Netanyahu's plan to keep building around Jerusalem was unacceptable.
The decision, announced personally by Netanyahu on prime-time television and hailed by even his left-wing Israeli critics as "historic," may put new pressure on Abbas to sit down with the Israeli leader after strong endorsement of the measure from the Obama administration in Washington.
"Israel today has taken a far-reaching step towards peace," Netanyahu said, repeating in English his brief speech to local viewers for the benefit of an international audience.
"It's time for the Palestinians to do the same," said the prime minister, whose coalition includes pro-settler parties.
For Abbas, touring South America to drum up support for Palestinian complaints that it is Netanyahu's right-wing coalition that is thwarting Obama's push for peace in the Middle East, a spokesman said the moratorium on new building permits in the West Bank fell short of his demands.
"Any return to negotiations must be on the basis of a complete settlement freeze, and in Jerusalem foremost," Abbas aide Nabil Abu Rdainah said, emphasising Palestinians' rejection of a halt to building in East Jerusalem and West Bank land annexed to the city by Israel despite international criticism.
Palestinian Prime Minister Salam Fayyad, whose efforts to boost the West Bank economy and curb anti-Israel militants have won him strong U.S. support, also dismissed Netanyahu's announcement.
"What has changed?," he said, recalling similar, less public, offers rejected during shuttle diplomacy by Obama's envoy George Mitchell in the past few months. "The exclusion of Jerusalem is a very serious problem for us."
Nonetheless, Palestinian sources said, U.S. officials had been in touch with Abbas to highlight the Israeli gesture.
"SIGNFICANT" STEPS
Yet Netanyahu assured the 300,000 Jewish settlers in the West Bank that "natural growth" of communities, in the form of schools and other public buildings, would go on in the 10 months of restriction on new building permits, as would the building of 3,000 homes already under construction or authorised.
A further 200,000 Jewish Israelis live on occupied land that Israel has incorporated into what it regards as its capital, Jerusalem, despite international refusal to recognise that and the Palestinian claim to a share of the city as their capital.
Netanyahu said: "We do not put any restrictions on building in our sovereign capital."
Within moments of his address, White House envoy Mitchell was saying in Washington that, while the United States did not agree with Israel on Jerusalem or the settlements, Israel's announcement was welcome: "It falls short of a full settlement freeze, but ... steps announced by the prime minister are significant."
Secretary of State Hillary Clinton, who angered Palestinians by publicly urging Abbas last month to resume talks without a settlement freeze, said: "Today's announcement ... Israel helps move forward towards resolving the Israeli-Palestinian conflict."
Israeli Defence Minister Ehud Barak said he hoped settlers' leaders would view the partial freeze in the context of ensuring Israel's good relations with the United States, citing the need to maintain Israel's military superiority in the region. Top of the Netanyahu government's agenda is Iran's nuclear program.
Abbas had earlier given vent to his frustration with Obama, whose tone on taking office in January and apparently frosty attitude to Netanyahu after he formed a government in March had prompted Palestinians to expect more favours from Washington.
"Till now he didn't do anything," Abbas said of the U.S. president in an interview with a newspaper in Argentina.
A further impasse following the Israeli move would trouble diplomats who voice concerns that scope for a resolution to the 60-year-old conflict which bedevils the West's relations with the Arab world may be diminishing rapidly. Abbas broke off talks with Netanyahu's predecessor over Israel's offensive last December in the Gaza Strip, ruled by Abbas's Islamist rivals, Hamas.
There did not appear to be any direct link between Netanyahu's widely expected decision on settlements and efforts that have gained speed over the past week to conclude a prisoner exchange deal between Israel and Hamas. Nonetheless, a possible release of Marwan Barghouthi, seen by many as a contender to take over from Abbas, could change the pattern of the disputes.
Abbas repeated his determination to retire at the next election, though the rift between his administration in the West Bank and Hamas in Gaza means a vote is far from imminent.
(Additional reporting by Ari Rabinovitch and Sangwon Yoon in Jerusalem and Erika Solomon in Ramallah; editing by Andrew Dobbie)

Reuters