BETHLEHEM, West Bank - British Prime Minister Gordon Brown demanded yesterday that Israel cease settlement construction and promised more money to jump-start the battered Palestinian economy.

In his first trip to Israel and the Palestinian territories as Britain's leader, Brown repeatedly stressed that economics are key to Mideast peace, and said Israel should ease travel restrictions in the West Bank that have hindered commerce.

But his strongest comments were reserved for the settlements: "I think the whole European Union is very clear on this matter: We want to see a freeze on settlements."

"Settlement expansion has made peace harder to achieve. It erodes trust, it heightens Palestinian suffering, it makes the compromises Israel needs to make for peace more difficult," Brown said at a news conference with Palestinian Authority President Mahmoud Abbas in the West Bank town of Bethlehem.

Abbas went further in his criticism of Israel's construction in disputed East Jerusalem and the adjacent West Bank, telling Brown that Israel lacks commitment to the "principles and spirit" of Mideast peace efforts. He singled out stepped-up construction of homes for Jews in areas of Jerusalem that the Palestinians claim for their capital.

At a joint appearance after meeting Brown later in Jerusalem, Israeli Prime Minister Ehud Olmert acknowledged that Israel disagreed with the Palestinians and Britain on the settlements, but added: "I am absolutely convinced, Mr. Prime Minister, that this should not stand in the way of an agreement between us and the Palestinians."

Olmert repeated his contention that agreement is "closer than ever" and said he hoped for an accord by year's end.

Israel and the Palestinians resumed peace talks late last year at a U.S.-backed conference in Annapolis, Md. Both sides had originally aspired to reach a final peace deal by the end of the year, but have backed away from that goal somewhat because of arguments over settlements and whether the Palestinians are capable of enforcing security in areas they control.

Under the first phase of the internationally backed peace plan known as the road map, which is the basis of the negotiations, Israel was to freeze all settlement construction and Palestinians were to crack down on extremist groups.

Brown's two-day visit to the region has been overshadowed by a claim from a Shiite militia holding five British hostages in Iraq that one of the captives killed himself.

Brown arrived in the region after visiting Iraq, where he met with Prime Minister Nouri al-Maliki and discussed the plight of British hostages kidnapped by a Shiite group a year ago. Shortly after his departure, he called the suicide report "a very distressing development" and demanded that the Shiite militia "immediately and unconditionally" release the Britons.