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By Allyn Fisher-Ilan
JERUSALEM (Reuters) - U.S. President Barack Obama's Middle East envoy is close to a deal with Israel on terms for resuming peace talks with the Palestinians, Israeli officials said on Wednesday.
"There appears to be a meeting of the minds and hopefully the Israeli-Palestinian dialogue will be able to re-start in the near future," an Israeli official said, summing up talks held by negotiators for Prime Minister Benjamin Netanyahu in Washington.
Under the prospective deal the negotiations could be held on the basis of two decades-old U.N. Security Council resolutions, 242 and 338, another official said.
Such a formula could be acceptable to Israel since it interprets those resolutions as falling short of a demand to withdraw from all of the West Bank, territory it captured in a 1967 war.
Palestinians, who seek a state in the West Bank and Gaza Strip, hold that the resolutions, which call for "withdrawal of Israel armed forces from territories occupied in the recent conflict," obliges Israel to return to pre-1967 lines.
Washington apparently hopes to persuade Palestinian President Mahmoud Abbas to return to peace talks based on the resolutions, enabling each side to cleave to its own interpretation and avoid conceding diplomatic ground on borders before negotiations resume.
However, Abbas has given no sign he has dropped a main Palestinian condition for a resumption of negotiations -- an Israeli settlement freeze in the West Bank in accordance with a 2003 U.S.-backed peace "road map" that charts a path to a Palestinian state.
Abbas aide Nabil Abu Rdainah told Reuters Palestinians objected to basing the talks solely on 242. "This means a return to square one," Rdainah said. "It would be a time-wasting process."
A progress report U.S. Secretary of State Hillary Clinton is due to deliver within days to Obama on Middle East envoy George Mitchell's mediation efforts could clarify the situation.
Many Palestinians felt humiliated when Obama last month called for Israeli restraint on settlements rather than repeat his call for a freeze.
Palestinians fear that Israel's West Bank settlements, deemed illegal by the International Court of Justice, would block the formation of a viable and contiguous state.
Netanyahu has refused to halt construction in settlements, arguing he needed to accommodate growing settler families. Israeli officials say Netanyahu has offered Mitchell a nine-month freeze on some settlement expansion, but only in areas beyond the outskirts of Jerusalem.
Under U.S. pressure, Netanyahu has agreed to negotiate the creation of a Palestinian state alongside Israel.
But he said such a state must be demilitarised and Palestinians have to recognise Israel as a Jewish state, a demand they fear could undermine claims to resettle or compensate Palestinian refugees of a 1948 war over Israel's founding.
In a speech in Jerusalem on Wednesday to an international conference of technological leaders, Susan Rice, Washington's ambassador to the U.N., urged the sides to move beyond procedural disputes to the peace table.
Palestinians suspended peace talks in December, when Israel launched a Gaza war Israel against Hamas Islamists firing rockets at the Jewish state.
"We must all decide whether we are serious about peace or whether we will lend it only lip service," Rice said, adding that "being serious about peace means taking risks for peace."

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