Prime Minister Benjamin Netanyahu and U.S. Middle East envoy George Mitchell failed to reach an agreement on the issue of West Bank settlements during a meeting Wednesday in London, according to spokespeople for the two men.

However, Netanyahu and Mitchell did make progress in their meeting, the spokespeople said in a joint message afterward, adding that the two agreed on the need to begin meaningful diplomatic negotiations between Israel and the Palestinians with the aim of reaching a regional peace agreement.

The next round of talks was scheduled for the beginning of next week in Washington. Israel will be represented at those talks by the PM's special envoy Yitzhak Molcho and Defense Ministry chief of staff Mike Herzog, who both participated in Wednesday's meeting.

The two will meet with Mitchell to discuss again the U.S. demand that Israel implement a settlement freeze.

Prior to the meeting, Netanyahu said his government was making progress toward reopening talks with the Palestinians and hoped to be able to do so shortly.

"We are making headway. My government has taken steps both in words and deeds to move forward," he said.

Netanyahu has pledged not to build any new settlements but wanted to enable what he called "natural growth" of existing enclaves.

The prime minister, whose comments during a photo opportunity were relayed to reporters by his spokesman, expressed hope the two sides would "shortly be able to resume normal talks."

"The goal is a wider peace, which is our common goal," he said.

Meanwhile, Palestinian officials said Wednesday that President Mahmoud Abbas is open to a meeting with Netanyahu at the United Nations next month.

The meeting would be the first between the two leaders since Netanyahu took office in March.

Abbas has refused to reopen peace talks until Netanyahu halts all construction in Jewish settlements in the West Bank. The Israeli leader rejects this demand.

The Palestinian officials said Abbas is not dropping his conditions. They say the meeting would be a chance to talk, but would not amount to negotiations.

The Palestinian officials spoke on condition of anonymity because a formal meeting hasn't been set.

Earlier, Israel's ambassador to the United Nations Gabriela Shalev told reporters that a meeting between Netanyahu, Abbas and U.S. President Obama at the UN was being planned, but declined to elaborate.

Meanwhile, the British Guardian reported that President Barack Obama is close to breaking the stalemate between Israel and the Palestinians by getting Israel to agree to a partial settlement freeze in exchange for a tougher U.S. stand against Iran's nuclear program.

The report, which cites U.S., European, Israeli and Palestinian officials, said that Obama will be ready to announce the resumption of long-stalled peace talks between Israel and the Palestinians by the end of September.

"The message is: Iran is an existential threat to Israel; settlements are not," the Guardian quoted one official close to the negotiations as saying.

In exchange for Israel agreeing to a partial and temporary settlement freeze, the U.S., Britain and France would push the United Nations Security Council to expand sanctions on Iran to include its oil and gas industry, the report said.

Israel is also seeking normalization with Arab states, which would include the right for El Al to fly within Arab states' airspace, the establishment of trade offices and embassies and an end to the ban on travelers with Israeli stamps in their passports.

A poll released Wednesday in Israel showed freezing settlements would be an unpopular move. Almost two-thirds of those questioned told pollsters they opposed a freeze, even in return for moves by Arab countries toward normalization of ties with Israel. Thirty-nine percent said they would support a freeze in return for Arab gestures.

Conducted by the Maagar Mohot polling company, the survey questioned 506
Jewish Israelis and had a margin of error of 4.5 percentage points.

Details of the negotiations are expected to be outlined Wednesday during Prime Minister Benjamin Netanyahu's meeting in London with George Mitchell, the U.S. special envoy to the Middle East.

"It has been pretty hard going but we are getting there," the Guardian quoted another official as saying. "We are closer to a deal with the Israelis than many think. The Arabs are more difficult to pin down."

The report said Obama plans to announce the breakthrough either at the meeting of the UN General Assembly in New York in the week of September 23 or at the G20 summit in Pittsburgh on September 24-25.

Obama plans to make his announcement together with Netanyahu and Palestinian President Mahmoud Abbas and sources said he hopes a final peace deal can be negotiated within two years.

Israel and the United States on Tuesday said they are closing the gaps over the contentious issue of West Bank settlement construction, senior American officials told Haaretz.

The Obama administration has demanded that Israel halt all construction in settlements in the West Bank, which the Palestinians claim for a future state.

Netanyahu has resisted calls for a total freeze on construction, arguing that the Bush administration had acquiesced to continued Israeli settlement activity in large blocs that are likely to be annexed by Israel in any future agreement with the Palestinians.

He reiterated during a joint press conference with British Prime Minister Gordon Brown at 10 Downing Street in London, that Israel will not limit construction in East Jerusalem.

"What we're seeking to achieve with the United States in the talks we've conducted, and will conduct tomorrow and will conduct after tomorrow, is to find a bridging formula that will enable us to at once launch a process but enable those residents to continue living normal lives," Netanyahu said.

After his talks with Mitchell, Netanyahu is scheduled to fly to Berlin for talks on Thursday with German Chancellor Angela Merkel.