U.S. washes its hands of efforts to obtain settlement freeze, works on return to indirect negotiations

EU warns of two states solution collapse, says Israel’s policy in Jerusalem to blame

Palestinians consult with Arab countries prior to going international

Egypt discusses with Abbas outcome of endeavors to reach settlement

Abul-Gheit says time running out for two states solution

The Obama administration is dropping its demand that Israel re-impose a temporary freeze on settlement construction in the West Bank, a U.S. official said, a setback for President Obama and the Mideast peace talks he is seeking to push forward.

The change in direction comes in advance of meetings of U.S., Israeli and Palestinian negotiators in Washington next week.

U.S. negotiators no longer believe that insisting on a settlement freeze is the best way to proceed, said the official, who spoke on condition of anonymity. But it was not immediately clear what other proposals the Obama administration might put forward.

News reports said Secretary of State Hillary Rodham Clinton would outline the new U.S. strategy in a speech.

The decision is likely to anger Palestinians, who have demanded an end to settlement construction as a condition for continuing direct negotiations that were re-launched in September.

Obama is heavily invested in the Mideast peace issue, seeing progress there as key to improving U.S. relations with the Muslim world. He faced loud criticism from Israel and its supporters for advocating the settlement freeze during the first months of his administration.

At Obama's urging, the two sides launched face-to-face talks this fall, but they fell apart over the settlement issue. A temporary freeze on construction in disputed territory expired in late September, and the government of Israeli Prime Minister Benjamin Netanyahu declined to renew it.

The U.S. has been pressing Israel to renew the freeze for three months, a period during which it hoped to negotiate the final borders of a Palestinian state. U.S. officials offered incentives including 20 stealth fighter jets worth $3 billion and a promise to veto anti-Israeli resolutions at the U.N. Security Council, including a possible effort by Palestinians to gain support for a unilateral declaration of statehood.

Under the U.S. proposal, once both sides agreed to the borders, Israel could have continued building in areas that would become part of Israel.

Netanyahu faced strong opposition when he brought the plan to his Cabinet last month. The Israeli government has not acted on it, and it is unclear whether the prime minister had the support to get it passed.

In the meantime, settler groups resumed construction in the West Bank. Separately, Israeli authorities announced that they would build more housing on disputed land in East Jerusalem, which Palestinians hope will be the capital of their independent state. Although the U.S. opposed such construction in East Jerusalem, it has not been included in the construction freezes.

Some analysis have said that the announcement of new construction in East Jerusalem reflects an Israeli calculation that Obama is politically weaker after the Democrats' drubbing in November elections.

Yasser Abed-Rabbo, secretary-general of the Palestine Liberation Organization's Executive Committee, told Palestinian media that the U.S. decision "was a declaration of the failure of U.S. efforts" to get a settlement freeze.

"Now the picture is very clear," Abed-Rabbo said, describing the U.S. move as "an attempt for more stalling."

Israeli media said Defense Minister Ehud Barak told a committee of the parliament, or Knesset, that talks with U.S. officials over a settlement freeze had stopped because Washington was distracted by the WikiLeaks controversy and its need to focus on the confrontation with North Korea.

But Barak said that in the absence of negotiations, Israel faces the danger of becoming increasingly isolated internationally.

Israel is concerned with the success of one Palestinian tactic: persuading countries to recognize an independent Palestinian state within borders that existed before the 1967 Middle East War.

The move has little practical effect, but Brazil and Argentina have done it recently. They probably will be joined by Uruguay next month.

Israel's Haaretz daily quoted sources in Netanyahu's office as saying efforts to impose a new settlement freeze broke down because of Palestinian insistence that the talks turn quickly to the issue of setting final borders.

Israeli reaction largely split along well-defined political lines. "The lesson of this is that the sky doesn't fall if Israel stands its ground and doesn't give in to every dictate," said Danny Dayan, chairman of the Yesha Council, a settler group.

Ilan Gilon, a lawmaker from the left-wing Meretz party, complained that the government was "dominated by the pro-settlement lobby."

Israel's policies in occupied east Jerusalem are harming the prospect of the Palestinians having their future capital there, which "seriously endangers" a two-state solution, the EU said.

"If current trends are not stopped as a matter of urgency, the prospect of east Jerusalem as the future capital of a Palestinian state becomes increasingly unlikely and unworkable," warns an annual EU report seen by AFP.

"This in turn seriously endangers the chances of a sustainable peace on the basis of two states, with Jerusalem as their future capital."

The Jerusalem Report 2010, which was put together by the EU heads of mission based in the Holy City as well as those based in the West Bank city of Ramallah, contains a series of EU policy recommendations.

The report examines Israel's expansion of settlement activity in east Jerusalem alongside its restrictive planning policies and the continuing demolitions and evictions there, warning they have "serious humanitarian consequences."

But such policies were also harming east Jerusalem's "crucial role" in Palestinian political, economic, social and cultural life, and causing it to be increasingly isolated from the rest of the occupied West Bank, it warned.

It said that Israel's attempts to exclusively emphasize the Jewish identity of the city threatened to "radicalize the conflict, with potential regional and global repercussions."

And it said the EU was increasingly concerned about Israel's "use of archaeology as a political-ideological tool" in a bid to cement the Jewish state's hold over the entire city.

Israel occupied and annexed east Jerusalem in 1967 and considers it its "eternal indivisible capital," in a move never recognized by the international community.

The future of east Jerusalem, which the Palestinians want as the capital of their promised state, is one of the most sensitive issues in the Middle East peace talks, which have been deadlocked since the end of September in a row over Jewish settlement building in the occupied territories.

Palestinian President Mahmoud Abbas held "urgent" consultations in Cairo with his Egyptian counterpart in the wake of the U.S. decision to abandon efforts to persuade Israel to renew a West Bank settlement moratorium.

Palestinian officials said Abbas also has requested an emergency meeting of Arab League foreign ministers to discuss the repercussions of Washington's move. That meeting is expected in the Egyptian capital within days.

Meanwhile, the U.S. said it is sending Middle East envoy George Mitchell back to the region next week in an effort to advance stalled peace talks between Israel and the Palestinians.

In announcing the Mitchell mission, State Department Spokesman P.J. Crowley said the freeze issue had come to overshadow the broader agenda and that it is time to shift tactics.

Crowley said Washington does not believe at this time that an Israeli moratorium can provide the basis for resuming direct negotiations. Palestinian President Mahmoud Abbas reacted to the news by saying the peace process is now "in crisis."

Chief Palestinian negotiator Saeb Erekat said that in light of the breakdown, and decisions by Brazil and Argentina this week to unilaterally recognize Palestine as an independent state, his government would formally appeal to the U.S. to do the same.

Erekat said if the U.S. wants to safeguard the two-state solution, it should recognize the Palestinian state within its 1967 borders, including all of the West Bank, East Jerusalem and the Gaza Strip.

The U.S. State Department expressed its disapproval of the move by South American countries to recognize Palestinian statehood, describing any unilateral action, in the absence of a peace accord between the parties, as unhelpful.

U.S. officials say a broad effort to achieve a two-state solution to the Middle East conflict will continue and that the goal of a framework agreement on core issues has not changed.

Major powers should push Israel and the Palestinians to agree a deadline for establishing an independent Palestinian state before a two-state solution becomes impossible to achieve, Egypt said.

Israelis and Palestinians held three rounds of U.S.-backed talks in September. Palestinians pulled out when a 10-month freeze on Jewish settlement building in the West Bank and East Jerusalem ended on September 26.

In some of Egypt's strongest language since the talks ended, Foreign Minister Ahmed Abul-Gheit said discussions should shift to an "end-game for a Palestinian settlement" after Washington had failed to push Israel to halt building work.

"The Americans have been informing all of us that their efforts did not succeed. They wanted to reach a moratorium on settlement activities with Israel. That came to an end now."

He said Egypt's concern was that "we continue haggling without (making) any breakthrough, then in few years there would not be a possibility of two states living side by side."

The Palestinians said "Israeli obstinacy" made Washington give up on efforts to freeze Jewish settlements and questioned whether the United States could ever help them attain independence.

Egypt became the first Arab state to reach peace with Israel when it signed a deal in 1979.

"You have a bi-national state or you have occupation or apartheid. The ... option which we are all preferring is to have two states instead of one state based on apartheid," Abul-Gheit said at a briefing during a visit to Bulgaria.

He said the quartet of the United States, European Union, United Nations and Russian Federation should devise a framework agreement that fixes a Palestinian state's borders and the status of East Jerusalem while ensuring Israel's security.

"If there would be an exchange of territories it has to be minimal," the minister said.

He said the agreement "can be drafted by the Americans, by the quartet, by a group of experts, two or three pages of a grand understanding to be offered by the international community to both parties" with a specific time for a deal to be reached.