Prime Minister Benjamin Netanyahu is negotiating a deal with Washington under which Israeli building in existing Jewish settlements could go forward in certain cases, Israeli and Western officials said on Tuesday.

In talks with U.S. President Barack Obama's Middle East envoy, Netanyahu has asserted that his government does not have the legal authority to stop building in cases in which tenders for new structures have already been awarded or when homes under construction have already been purchased.

"I'm confident that we will be able to reach an agreement in the near future that will enable us to put the settlement issue aside and to move forward to what I regard as far more substantive issues in the peace process," Michael Oren, Israel's newly appointed ambassador to Washington, told Reuters.

Under pressure from Obama, Netanyahu this week publicly accepted for the first time the internationally backed goal of Palestinian statehood, but set a series of pre-conditions that were rejected by the Palestinians.

Netanyahu has refused to accept Obama's direct call for a full settlement freeze in the Israeli-occupied West Bank, defending building in existing blocs to accommodate growing Jewish settler families, known as "natural growth."

Palestinian President Mahmoud Abbas has demanded a halt to all building, including natural growth, as a condition for resuming stalled peace negotiations with Israel.

"It's not about tenders. It's not about technicalities. Any kind of settlement activity undermines the two-state solution," said senior Palestinian negotiator Saeb Erekat. "I don't think the Americans will buy this."

"CREATIVE" PROPOSALS

Oren, in an interview in Jerusalem, said he could not provide details about what an agreement with Washington would entail. He said "creative" proposals have been presented by both the Netanyahu and Obama administrations to narrow differences, and asserted Israel's ability to halt all building was limited.

"This is a country of law, and citizens of the state of Israel have rights under that law," Oren said. "If a person has purchased a house, if a person has taken out a contract for building a house, if a corporation is involved in a construction activity, the Israeli government does not have a right under Israeli law to stop them."

"If it tries to, they will appeal to the (Israeli) supreme court and, my guess is, the supreme court will view in favor of those appellants," Oren added.

U.S. officials in the region had no immediate comment but a senior Western official said some in Washington were "sympathetic" to Netanyahu's position. A full settlement freeze could break up the prime minister's right-leaning coalition.

In an interview with Israel Radio, Israeli Foreign Minister Avigdor Lieberman cited "understanding" among U.S. and European leaders about Israel's "basic demand to allow at least natural growth" in settlements.

But British Prime Minister Gordon Brown, in a telephone conversation with Netanyahu, called for a "complete freeze" in line with a 2003 U.S.-backed peace "road map," his office said.

In an interview with U.S. television, Netanyahu said he would meet Obama's Middle East envoy, George Mitchell, during a visit to Europe next week to discuss settlements, and that he hoped to find "a common position."

A senior Western diplomat said Washington's focus was shifting somewhat, from the highly contentious settlement issue to ways to restart negotiations with the Palestinians.

One option under consideration by the Obama administration would be to expedite Israeli-Palestinian negotiations over the borders of a future Palestinian state, the diplomat said.

If a deal were to be reached on borders, construction could continue in those areas which would remain under Israeli control. Israel wants to keep major settlement blocs.