Israel and the US are within sight of a compromise deal on halting settlement construction in the West Bank and paving the way to a resumption of political negotiations with moderate Palestinian leaders.

Widespread indications that Israel will agree to a partial freeze on settlement construction were reinforced yesterday when its Prime Minister Benjamin Netanyahu said he hoped a "bridging formula" on settlement building would be reached. Mr Netanyahu will hold detailed negotiations in London today with the US presidential envoy George Mitchell.

Mr Netanyahu has already said a meeting with the Palestinian President Mahmoud Abbas is possible during or immediately after the UN General Assembly in New York on 23 September. Barack Obama may well announce the resumption of negotiations alongside the two men.

Mr Abbas has said he will not resume talks without a freeze. Washington has argued that a moratorium would allow talks on the borders of a future Palestinian state which would then determine where Jewish homes could and could not be built.

Mr Netanyahu has been seeking in return a promise from the US that if its offer of engagement with Iran is rebuffed, it will lead to swift and stringent sanctions, including on oil and gas, as pressure on Tehran to halt its perceived military nuclear programme. He also wants steps by Arab states towards "normalisation" of relations.

While Saudi Arabia has been reluctant for such moves without a final Israeli-Palestinian peace deal, smaller Gulf states – most publicly Bahrain – have appeared warmer to the idea.

The pressure to resume negotiations is likely to prove irresistible for Palestinians, but the settlement freeze appears to fall short of their expectations. It seems likely to allow for about 2,500 housing units, already deemed under construction, to go ahead. Mr Netanyahu yesterday confidently reasserted that no freeze could apply to the Israeli Arab East Jerusalem.

Also Mr Netanyahu has urged Britain to stop supporting the Israeli Army veterans' group Breaking the Silence, which is strongly critical of the military assault on Gaza in January.