Jerusalem and Washington are currently discussing whether Ariel constitutes one of the settlement blocs where - under a compromise agreement being worked out - construction that has already begun can continue, diplomatic sources told The Jerusalem Post Tuesday.

According to the sources, the two sides are continuing to discuss a compromise solution on settlement construction whereby most of the 2,500 housing units currently under construction in the West Bank would continue to be built, but Israel would declare a temporary moratorium on any new projects.

Most of those 2,500 units are in the large settlement blocs that straddle the Green Line. A question, however, has emerged regarding Ariel, which juts deeper inside the West Bank then the other settlement blocks, such as Ma'aleh Adumim, Givat Ze'ev, Gush Etzion and Betar Illit.

There are currently some 98 units under construction in Ariel.

The sources said the Americans want to take Ariel out of the equation and stop all building there. Israel, on the other hand, defines Ariel as one of the large settlement blocs.

Discussions on the matter are continuing in advance of the planned meeting in about two weeks between Prime Minister Binyamin Netanyahu and US Mideast envoy George Mitchell in London.

Officials in the Prime Minister's Office denied any knowledge of this discussion, saying that nothing was being released about the negotiations, and that only a few people truly knew what was happening in the ongoing meetings on the matter between Israeli and US officials.

Another issue that still needs to be worked out between the US and Israel is an "exit strategy" for a settlement freeze, or what building the US will permit once the freeze ends.

Israel is keen on returning to the understandings that it had with the US under the Bush Administration, whereby settlement construction would be permitted in the large settlement blocks as long as this building took place inside the settlement's current construction lines.

The widespread feeling among diplomatic officials is that when and if Israel and the US reach an agreement on a settlement freeze, it would be just a matter of time before Israeli-Palestinian talks were renewed.

This is based on a sense that even though Palestinian Authority President Mahmoud Abbas has conditioned talks with Israel on a settlement freeze - something he did not do with former prime minister Ehud Olmert - nevertheless, once the US and Israel agreed on a formula, the Palestinians would have little choice but to re-start the talks.

There is also an expectation that once the talks begin, some Arab countries such as Morocco, Bahrain and perhaps other Persian Gulf countries, would ante up with some normalization gestures toward Israel. There is little belief, however, that Saudi Arabia would make any such gestures.

Ariel Mayor Ran Nachman, said he knew nothing of any plans to stop existing building projects in his city.

Dani Dayan, who heads the Council of Jewish Communities of Judea, Samaria and the Gaza Strip, said his understanding was that there was "no legal way to stop the ongoing construction." He dismissed all talk to the contrary as merely "spin."

However, MK David Rotem (Israel Beiteinu), a former legal adviser to the council, told the Post recently that since the settlements were under military administration, the government could order a halt to existing projects, but it would have to compensate the contractors, investors and buyers.

Nachman blamed the American attitude against settlements in part on what he termed the "Jew boys" in the White House, such as Chief of Staff Rahm Emanuel and senior Obama adviser David Axelrod.

There was no peace before the Six Day war in 1967, and at that time there were no settlements, Nachman said. Similarly, he said, Ariel did not even exist until 1977, but the fact that it did not exist did not facilitate peace. And again, he added, Israel destroyed its settlements in Gaza four years ago, but nothing changed.

The only way to achieve peace, he said, was to come to permanent status solution and deal with the settlements within that context. The issue of settlements, he said, was "purely symbolic."

Meanwhile, a number of settlement heads met in Ma'aleh Adumim on Tuesday to protest a de facto settlement freeze already in effect, noting that Netanyahu has not authorized a single new construction project in the West Bank since taking office at the end of March.

The settlement leaders plan to launch a campaign against both the de facto freeze and any freeze that may be agreed upon with the Americans. They plan to hold protest vigils outside Netanyahu's residence and to call on right-wing parties to leave the coalition if the current refusal to authorize new projects continues.•