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By Andrew Quinn and Yasmine Saleh
CAIRO (Reuters) - The United States does not accept Israeli settlements on occupied Palestinian land but believes resuming peace talks is the best way to curb them, U.S. Secretary of State Hillary Clinton said on Wednesday.
Clinton, facing Arab criticism over a perceived U.S. tilt to accommodate Israeli expansion of West Bank settlements, said Washington's stance on the tinderbox issue had not changed.
The remarks were received positively by regional ally Egypt, which wants a focus on the "end-game" of a Palestinian state. But the Palestinians voiced dismay at the lack of progress and said their idea of independence alongside Israel may be doomed.
"We do not accept the legitimacy of settlement activity and we have a very firm belief that ending all settlement activity, current and future, would be preferable," Clinton said after meeting Egyptian President Hosni Mubarak in Cairo.
"Getting into final-status negotiations will allow us to bring an end to settlement activity," she said.
Cairo was Clinton's last stop on a tour in which she faced Arab frustration over signs that U.S. President Barack Obama, stymied by the Middle East deadlock, no longer backs Palestinian demands that Israel immediately stop settlement construction.
"The Egyptian vision is that we have to focus on the end-game, and we should not waste time to get stuck on this issue or that issue in order to start negotiations. We focus on the end-game," Egyptian Foreign Minister Ahmed Aboul Gheit said.
Arab discontent had flared after Clinton endorsed Israel's view that settlement expansion should not be a bar to resuming peace talks, in contradiction to the Palestinian position.
Aboul Gheit said Egypt wanted assurances that any resumption of peace negotiations, stalled since December, would ensure Palestinian statehood and not be used to "waste time."
A U.S. official said of Egypt's position: "It doesn't overlap exactly with ours, but it has moved a lot closer."
Israeli Prime Minister Benjamin Netanyahu has refused to halt construction in the settlements, many of which the Jewish state plans to annex under any eventual peace accord.
The World Court has branded the settlements illegal and Palestinians fear they could deny them a viable state. They have also been incensed by Netanyahu's demand that any such state be without sovereign powers like an army and control of airspace.
"This is dictation and not negotiations," senior Palestinian official Saeb Erekat said in the West Bank city of Ramallah.
It may be time for Palestinian President Mahmoud Abbas to "tell his people the truth, that with the continuation of settlement activities, the two-state solution is no longer an option," Erekat told a news conference.
He raised the possibility of Palestinians instead being absorbed into the Israeli polity -- something that would spell the end of the Jewish majority. Israel rejects that option.
Netanyahu has proposed limiting settlement building for now to some 3,000 homes already approved by Israel. He does not see building in East Jerusalem, annexed in defiance of international opposition, as settlement. Palestinians want a capital there.
"The Israelis are offering this. It can be rejected by everyone. There is no imposition," Clinton told reporters.
A U.S. official said the push for talks was aimed in part at holding both Palestinians and Israelis accountable -- saying that thus far most pressure had been on Abbas to agree to talks.
Washington felt it was time to see what Netanyahu envisioned when he offered to negotiate immediately, the official said, adding: "We'd like to see what he brings to the table."
Clinton has also praised Abbas for positive steps towards talks, including improving security on the West Bank.
"We want to assure you that our goal is a real state with real sovereignty, with the kind of borders that will enable the people of Palestine to make decisions about where they live and what they do on their own," Clinton said.
Her visit to Egypt followed a stop in Morocco where she urged Arab foreign ministers to put aside recriminations and support moves to resume the talks, suspended since December.
Abbas faces intense domestic pressure from Hamas Islamists who control the Gaza Strip, and any compromise on settlements could hurt him politically before Palestinian elections he has scheduled for January 24. Hamas has rejected holding a vote.
(Additional reporting Cynthia Johnston in Cairo and Mohammed Assadi in Ramallah; Writing by Alastair Sharp and Cynthia Johnston; Editing by Angus MacSwan)