LONDON (Reuters) - Israel's Defense Minister Ehud Barak said on Monday he and U.S. Middle East envoy George Mitchell had made progress in their second session of talks within a week on encouraging regional peace.

"I think there is progress. There's still a way to go," Barak told Reuters after the talks in London.

U.S. President Barack Obama has pressed Israel to halt settlement activity as part of a bid to revive peace talks under which the Palestinians would gain statehood.

In a rare dispute between Israel and its main ally, the United States, Israeli Prime Minister Benjamin Netanyahu has refused to declare a settlement freeze, saying some building should continue to match population growth in the enclaves.

Barak said he expected no imminent announcement on Israeli settlement building. "I think it will take still a few weeks before it will become clear," he said.

However Barak, who last met Mitchell on Tuesday in New York, said he was optimistic about the chances of "preparing the ground for launching a major peace process."

In Washington, the U.S. State Department released a joint statement from Barak and Mitchell saying they had "constructive discussions" that will continue with Netanyahu, Barak, and other Israeli officials "in the near future."

"They re-affirmed their commitment to the common objective of a regional peace between Israel and the Palestinians, Syria, and Lebanon and the steps necessary to achieve it," the statement said.

"These included measures on security and incitement by the Palestinians; steps by Arab states toward normalization with Israel; and, from Israel, actions on access and movement in the West Bank and on settlement activity," it added.

A senior U.S. official told Reuters that Washington is asking Arab governments whether they might ease sanctions on Israel if it freezes settlement on land Palestinians want for a state.

SEEKING FORMULA

"I think the Americans are active on this issue," Barak said when asked to confirm this.

"While they are demanding from Israel steps and concessions in order to enable this regional peace effort to take off, they are approaching the Arabs as well and asking what they can contribute in terms of ... starting normalization with Israel."

"We are looking and trying to find a formula (which) needs to show our readiness to be sensitive to the needs of others."

Barak described the talks with Mitchell as "a very good, constructive discussion" and said they had addressed all aspects of the Middle East peace process including the Palestinian, Syrian and Lebanese tracks. He said they had discussed steps which could be taken to ensure "our slight differences regarding how to deal with the issue of settlements will ... be clarified but within the context of the need to push ahead the wider peace agreement."

Barak has previously raised the possibility Israel might temporarily refrain from starting new building projects -- while continuing many under way -- in settlements in return for initial steps toward a regional peace agreement.

The Israeli proposal falls short of demands by Obama and the Palestinians for a settlement freeze in the occupied West Bank.

Arab gestures in return for a freeze on settlement building could include opening airspace to Israeli airliners, allowing roaming calls by Israeli mobile phones or letting in tourists whose passports show they have also visited Israel.

However, Arab leaders have so far been cool to such suggestions, Western diplomats said.

German Foreign Minister Frank-Walter Steinmeier said during a visit to Israel that without a halt to settlement-building, there would not be decisive progress.

"Many, many obstacles lie on the road to a two-state solution and time will, without doubt, work against us," he said after meeting Netanyahu. "Therefore, this is a matter of urgency."

He also said Palestinians had to stick to their commitments. "Everyone who knows the region knows that success will not happen overnight," he said.