Israel is considering enacting a temporary freeze on settlement construction, excluding projects already underway, if the United States agrees to continued construction for natural growth once the freeze ends, an Israeli government source has told Haaretz.

U.S. Mideast envoy George Mitchell has been conducting low-profile talks with Israel in a bid to reach an agreement on the settlement issue, the government official said.

Mitchell was due to meet with Prime Minister Benjamin Netanyahu in Paris on Friday, but Netanyahu postponed the meeting and sent Defense Minister Ehud Barak to Washington for talks, the source said.

Barak believes that any progress on both the Palestinian and the regional peace tracks will render the settlement issue considerably less important, the government official said.

"If there's progress on the peace talks, it will become clearer where the big settlement blocs are, and the gaps will become easier to bridge," said a source close to Barak.

Israel and the United States have already agreed that all unauthorized outposts are to be removed "within weeks or months," no new settlements are to be built and no Palestinian land is to be confiscated.

However, they disagree over the duration of the settlement freeze and the future of settlement construction projects already underway.

Israel is offering to halt some settlement construction for up to six months, while the United States is interested in a considerably longer period.

In addition, Israel wants to convince Washington that building projects currently underway should be allowed to continue - including the construction of up to several thousand housing units.

Italian Prime Minister Silvio Berlusconi raised the settlement issue in a meeting with Netanyahu in Rome yesterday, telling him that settlement construction may become an obstacle for peace, and must be stopped.

Netanyahu is reported to have replied that "an agreed-upon formula can be found with the U.S. if this is what they're looking for."

Speaking at a press conference after the meeting, Netanyahu said he had no intention of giving up his vision of a final-status agreement in which a demilitarized Palestinian state acknowledges Israel as a Jewish state.

"This isn't a trick or a maneuver," Netanyahu said. "It will become a stepping stone on the way to true peace."

Stop trading with Iran, PM pleads

Netanyahu also asked Berlusconi to reduce trade with Iran, especially oil trade.

Berlusconi said halting projects now underway would result in lawsuits against Italian companies and make it harder for Iran to settle its large financial debt to Italy. He told Netanyahu that some Italian companies have been operating in Iran for many years.

"If we stop now, the Iranians will sue them and place heavy fines on the companies," said Berlusconi. He also said if trade with Iran were to cease, Italy might find it difficult to reclaim Iranian debts amounting to more than $1 billion.

Netanyahu and Berlusconi also discussed the Iranian nuclear program, with the Italian leader saying Iran should not have nuclear weapons.

Netanyahu said the suppression of protests in Iran shows the country is a threat. "All free people in the world should salute the courage of Iranian citizens facing shootings in the streets," he said.