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By Cynthia Johnston and Yasmine Saleh
CAIRO (Reuters) - Israel's president said on Sunday expanding Jewish settlements in the occupied West Bank was a "marginal" issue blocking resumption of peace talks with the Palestinians.
But Egyptian President Hosni Mubarak, speaking at a joint news conference with Shimon Peres, said Israeli construction work on land captured in a 1967 war should stop and that Israel should take "courageous decisions" to push forward peace.
Egypt and other Arabs have blamed the United States for not doing enough to press Israel to stop settlement building work.
Prime Minister Benjamin Netanyahu has balked at Washington's calls for a full settlement freeze, saying Israel must accommodate the "natural growth" of settler families.
"The minute we shall start to negotiate there won't be new settlements, there won't be confiscation of land," Peres said on a visit to Egypt, the first Arab state to sign a peace treaty with Israel and which plays a mediation role in the conflict.
Palestinian Prime Minister Salam Fayyad said on a tour in the West Bank on Sunday that Israeli leaders should stop "equivocating" on the issue. He reiterated Palestinian demands for a total settlement freeze before peace talks could resume.
"The time has come for there to be complete recognition of the need for a comprehensive settlement freeze in all of the occupied territory --including, and especially, in Jerusalem and around Jerusalem," Fayyad told reporters in the Jordan Valley.
Palestinian President Mahmoud Abbas has said he would not renew negotiations with Israel unless it agreed to freeze settlement expansion. He has urged Washington to do more.
U.S. President Barack Obama has said Israel's approval last week of a plan to build 900 new homes in a Jewish settlement near Jerusalem is "very dangerous" because it would fuel Palestinian anger and undermined peacemaking.
But he has backed Israel's position that stopping should not be a condition for resuming talks suspended since December.
Peres, whose post is largely ceremonial, said the settlements issue was being blown out of proportion.
"Unfortunately, it's a marginal issue, it is some building of houses that became a central issue for the wrong reasons. My answer is even this issue can be settled by negotiations and agreement," Peres said, calling for a swift restart to talks.
'PEACE STILL POSSIBLE'
Mubarak, who a day before Peres' arrival said Israel was creating new obstacles to peace, said it was a time for a brave move for peace from the Israeli leadership.
"We want an end to settlement in occupied lands including East Jerusalem and to resume the negotiations about all the issues on the final status, from where they stopped," Mubarak said.
"I say peace is still possible. The need is growing for the political will from Israel's side that is conscious of the regional situation and realises the dangers of losing the peace opportunity and that it take courageous decisions needed," he said.
U.S. ally Egypt's mediation role has recently included involvement in a bid to secure the release of Gilad Shalit, an Israeli soldier held in Gaza, in exchange for Israel's freeing of hundreds of Palestinian prisoners.
The two leaders did not address that issue in their news, conference despite mounting speculation that a deal could be concluded by the end of this month.
Before Sunday's talks, an Israeli diplomat said discussions were expected to cover Egypt's efforts to broker a deal between Abbas's Fatah group in the West Bank and Islamist Hamas, which controls Gaza. There has been little sign of progress.
(Additional reporting by Jeffrey Heller and Allyn Fisher-Ilan in Jerusalem and Erika Solomon in Ramallah; Writing by Edmund Blair; Editing by Elizabeth Fullerton)