BERLIN - The Obama administration has agreed to Israel's request to remove East Jerusalem from negotiations on the impending settlement freeze.

According to both Israeli officials and Western diplomats, U.S. envoy to the Middle East George Mitchell has recognized the fact that Prime Minister Benjamin Netanyahu cannot announce a settlement freeze in East Jerusalem. The officials said the U.S. will not endorse new construction there, but would not demand Jerusalem publicly announce a freeze.

Netanyahu presented a proposal on Wednesday for resolving the ongoing Israeli-American dispute over construction in the settlements. In a meeting with Mitchell, Netanyahu suggested a temporary freeze, reportedly for nine months, on construction in the West Bank, a government source said.

Netanyahu also said that Palestinian Authority President Mahmoud Abbas' reported willingness to meet with him was "a positive first step."

The Americans are slated to respond to Netanyahu's proposal at a meeting in Washington next week between Mitchell and two Israeli officials: Netanyahu's envoy, attorney Yitzhak Molcho, and Defense Minister Ehud Barak's chief of staff, Brig. Gen. Mike Herzog.

Mitchell himself will return to Jerusalem in the second week of September with the goal of finalizing an agreement.

The new Israeli proposal will exclude some 2,500 housing units on which construction has already started.

Additionally, in special cases where it is necessary to keep "normal life," Netanyahu wants to be able to erect public buildings in the settlements - mainly kindergartens and schools.

Finally, Israel wants the freeze to have a clear "exit plan." In Israel's view, the freeze is a confidence-building measure that must be matched by reciprocal steps from the PA and Arab states. If these fail to materialize, Israel wants an American guarantee that it will not oppose renewed building.

Following their meeting, Mitchell and Netanyahu issued a brief joint statement saying that "good progress" had been made, and the talks would continue.

However, the statement also included that the two "agreed on the importance of restarting meaningful negotiations between Israelis and Palestinians and working toward a comprehensive peace, and that all sides need to take concrete steps toward peace."

At his press conference, Netanyahu reiterated that good progress had been made at the meeting, but said some issues remained unresolved. The goal, he said, is "to strike a balance" that would meet the settlers' basic needs while also enabling peace talks to resume.

Responding to Palestinian reports that Abbas had expressed willingness to meet with him at next month's UN General Assembly session in New York, Netanyahu said that if Abbas "is behind this declaration, that would be progress. This is a positive thing, a positive first step."

Until now, Abbas has refused to meet with him unless he first imposes a total freeze on settlement construction.

Netanyahu said he is willing to discuss all the well-known final-status issues, such as Jerusalem, borders and the refugees, but also intends to raise issues of his own - primarily the demand that the Palestinians recognize Israel as a Jewish state and that any agreement explicitly declare the conflict over and bar any further claims.

"We also have core issues, and the issue of recognition is core, in my view," he said. "If we insist on the recognition, there will be a peace agreement."

Netanyahu is scheduled to meet German Chancellor Angela Merkel on Thursday for talks on efforts to reach a peace agreement in the Middle East.

The premier met with German head of state Horst Koehler on Wednesday, after talks with Mitchell in London.

On Netanyahu's agenda are garnering European support for a tougher stance against Iran and reaching a deal on settlement construction in the West Bank, the cessation of which is a key Palestinian precondition for going back to the negotiating table.

Netanyahu is due to meet German Foreign Minister Frank-Walter Steinmeier in the morning before being greeted by Merkel in the chancellery in the afternoon.

Merkel preceded the visit by calling for a greater readiness for compromise on Netanyahu's part, in an interview with German television.

Merkel told the N24 broadcaster on Wednesday that "we shouldn't let the window of opportunity pass," and renewed calls for the so-called two-state solution to be implemented.

"The time is absolutely right. Let us do everything to use it," Merkel said.