Israeli Defence Minister Ehud Barak voiced concern on Monday over a deep rift with the United States over settlement policy and said Israel should do more to try to achieve peace with the Palestinians.

"The alienation that is developing with the United States is not good for Israel," said Barak, head of the centre-left Labour Party in right-wing Prime Minister Benjamin Netanyahu's governing coalition.

In an interview with Israel Radio on the country's annual memorial day for its soldiers, Barak called for a "far-reaching Israeli diplomatic initiative" on peace, including talks with the Palestinians on core issues of the Middle East conflict.

"We have strong ties with the United States, a bond, long-term friendship and strategic partnership. We receive three billion dollars from them each year, we get the best planes in the world from them," he said.

"For all these reasons we must act to change things," Barak said, while voicing doubts Netanyahu would soon enjoy the same warm ties with the White House as his predecessors did when President George W. Bush was in office.

With Netanyahu and U.S. President Barack Obama sharply at odds over settlement policy in occupied areas Palestinians want for a state, Barak held out the prospect of reshaping Israel's government so that it could make bold land-for-peace moves.

He gave no specifics but political commentators have raised the possibility of bringing in former Foreign Minister Tzipi Livni's centrist Kadima party to keep Netanyahu's coalition in power if pro-settler factions decide to pull out.

"With a broad readiness to go for a (peace) agreement, Israeli governments have overcome many obstacles in the daily discourse with the Americans about building in this or that settlement or a Jerusalem neighbourhood," Barak said about long-standing differences with Washington over the issue.

"CONCRETE STEPS TOWARD PEACE"

Barak's comments echoed a call last Thursday from U.S. Secretary of State Hillary Clinton for Israel to take "concrete steps toward peace" or risk empowering Islamist militant groups such as Palestinian Hamas and Lebanese Hezbollah.

The Obama administration responded angrily last month when Israel announced a project, during a visit by U.S. Vice President Joe Biden, to build a 1,600 more homes for Jews in a part of the occupied West Bank that it annexed to Jerusalem.

The Palestinians subsequently cancelled plans to enter into U.S.-mediated, indirect talks with Israel and Netanyahu has yet to respond to a U.S. list of steps that Washington wants him to take to coax them back to the negotiating table.

Political sources in Israel said Washington proposed 11 such "confidence-building" measures, which have not been disclosed publicly but are thought to include freezing Israeli construction in East Jerusalem, captured by Israel along with the West Bank in a 1967 war.

The Palestinians want East Jerusalem as the capital of the state they intend to establish in the West Bank and the Gaza Strip. They say settlements could deny them a viable state.

The political sources said Netanyahu, who has pledged not to place curbs on building homes for Israelis in and around East Jerusalem was unlikely to agree in full to all of the steps Washington seeks.

To do so, the sources said, could cause his coalition to disintegrate, and continued friction with Obama could be a price the Israeli leader would be willing to pay to remain at the helm.