Optimism is growing within the U.S. and Israeli governments that direct peace talks between Prime Minister Benjamin Netanyahu's government and the Palestinian Authority could begin as early as this fall, said diplomats involved in the process.

Negotiations between the U.S. and Israel over freezing Israel's settlements in Palestinian territories remain contentious, and it isn't certain a compromise will emerge that will allow the three parties and Israel's Arab neighbors to move forward on other issues.

But advances in those talks are feeding hopes that President Barack Obama could meet this month with Israeli Prime Minister Netanyahu and Palestinian Authority President Mahmoud Abbas on the sidelines of the U.N. General Assembly in New York, diplomats said. The three men could then announce the resumption of direct Israeli-Palestinian peace talks brokered by the U.S., said U.S. and Israeli officials.

Such a move would help the U.S. in its effort to build international consensus on isolating Iran over its nuclear program. Mr. Obama set a late September deadline for Tehran to respond to U.S. offers for direct talks over the nuclear issue, and some Arab governments have expressed reluctance to cooperate with the West on that front without some movement toward the establishment of an independent Palestinian state.

U.S. diplomats and members of the United Nations Security Council, plus Germany, met in Frankfurt on Wednesday to discuss Iran. Participants in the talks said Tehran has yet to respond concretely to the international community's offer, despite conflicting statements in the Iranian media.

Iranian news outlets reported Wednesday that Mr. Obama sent a second letter to Iran's Supreme Leader Ayatollah Ali Khamanei in a bid to open direct Iran-U.S. negotiations, which the White House neither confirmed nor denied.

"We share with the Obama administration the appreciation of the need to resume negotiations with the Palestinians so that we can intensify our focus on the main threat facing the Middle East and the world -- which is the threat of Iran," Israel's new ambassador to the U.S, Michael Oren, said in an interview. "We're hopeful that we can resume talks this fall," he said.

A senior U.S. official briefed on the negotiations with the Israelis said: "There is reason for optimism" that Israeli-Palestinian talks could resume shortly. "But it's not yet a done deal."

The Obama administration's point man on the Mideast, former Maine Sen. George Mitchell, met Wednesday with Israeli officials in New York as part of his effort to secure an Israeli freeze on settlement activity. The freeze is viewed in Washington as a prelude to formal peace talks. Mr. Mitchell has been lobbying Arab states to take steps toward normalizing their relations with Israel, such as establishing commercial offices and airline links.

President Obama has demanded that Israel cease all settlement activity, both in the West Bank and East Jerusalem, but Mr. Netanyahu hasn't agreed to a halt in East Jerusalem.

The U.S. and Israel have made advances on the issue in recent weeks, but the freeze could be less expansive than President Obama first envisaged, said officials briefed on the diplomacy. Israel is seeking to establish a six-month to one-year moratorium on new building, said these officials, while still limiting a freeze to the West Bank and allowing the completion of structures already under construction.

It remains unclear if Mr. Obama will ultimately sign off on such an agreement.

A watered-down freeze could also result in the Palestinian Authority and Arab states rejecting a return to dialogue.

"If Obama approves continued settlements in East Jerusalem, Obama has pulled out of the Mideast peace process," said Nabil Shaath, a former Palestinian Authority foreign minister and a close confidante of Mr. Abbas.

Steps by other Arab states toward normalized relations with Israel are also likely to be less expansive than Mr. Mitchell initially sought, said U.S. and Middle East diplomats. Washington was specifically focused on gaining concessions from Saudi Arabia, but has so far been rebuffed by King Abdullah.

Still, most U.S. and Middle East officials say they believe there will be enough compromises by all parties to allow lower-level negotiations to commence this fall.