US Secretary of State Condoleezza Rice admitted on Monday that the Israelis and Palestinians have a lot of work to do if they are to strike a peace deal by the end of the year.

At the start of her 18th visit to Israel and the Palestine in the past two years, Rice welcomed Israel's release of 198 Palestinian prisoners but urged both sides to make much more progress.

"We continue to have the same goal, which is to reach agreement by the end of the year," Rice told reporters traveling with her on the plane from Washington to Tel Aviv.

"We have a lot of work ahead to do that, and obviously it's a complicated time, but it's always complicated out here," she said ahead of her talks with Israeli and Palestinian negotiators in Occupied Jerusalem.

The two sides formally relaunched the peace process after a seven-year hiatus at a US-hosted conference last November, with the goal of signing a full peace deal by the time President George W. Bush leaves office in January 2009.

But they have made little tangible progress on resolving the core issues of the conflict, including final borders, the status of Occupied Jerusalem and the fate of the 4.5 million UN-registered Palestinian refugees.

The process has been complicated by Israeli settlement expansion in the Occupied West Bank, including Occupied East Jerusalem, and by the seizure of the Gaza Strip by the Hamas movement in June 2007.

Rice strongly criticized the expansion of the Jewish settlements after Israel announced a new building project in Arab Occupied East Jerusalem on the eve of her last visit in mid-June.

This time her trip follows the release of 198 Palestinian prisoners earlier on Monday in what Israel said was a goodwill gesture to Palestinian President Mahmoud Abbas. Rice hailed the release, calling it "a very good step."

This is her first visit since Prime Minister Ehud Olmert announced on July 30 that he will resign to battle corruption allegations after his centrist Kadima party chooses a new leader in September - another cloud on the horizon.

Tzipi Livni, the foreign minister leading Israel's negotiating team with the Palestinians, is a front-runner to replace him, as is Transport Minister Shaul Mofaz, a hawkish former general.

Livni on Thursday played down the likelihood of meeting the goal set at November's peace conference of agreeing a full deal this year, warning that "premature" efforts to bridge gaps could lead to "clashes." Rice sought to dispel any notion that pressure was being brought to bear.

"It's extremely important to just keep making forward progress rather than prematurely to come to some set of conclusions," she said.

Although Rice urged Israel to allow Palestinians more freedom of movement, she said it had lifted "significant checkpoints" blocking Palestinian access to towns in the Occupied West Bank.

And while the Palestinians had to improve security, she praised Egypt's role in brokering a two-month-old truce in the Gaza Strip that has all but stopped rocket attacks on Israel even if it remains "very fragile."

"Ultimately Gaza has to be resolved, and it has to be resolved on the basis of [Abbas'] program for it," she said.

The US diplomat was due to hold separate meetings in Occupied Jerusalem on Monday with Livni and top Palestinian negotiator Ahmad Qorei, as well as join Israeli Defense Minister Ehud Barak for dinner in Tel Aviv.

On Tuesday she was due to visit Abbas in Ramallah after holding talks with Qorei and Livni in Occupied Jerusalem.