Israeli Prime Minister Benjamin Netanyahu has proposed Palestinian statehood with temporary borders, to sidestep a deadlock over settlements ahead of talks on Friday with a U.S. envoy, a newspaper said.

Palestinian President Mahmoud Abbas has rejected past Israeli suggestions for a state with provisional borders, but the Haaretz newspaper said Netanyahu was proposing a new interim deal to try and entice him back to the negotiating table.

There was no immediate comment from either leader on the front-page report published as the U.S. Middle East envoy, George Mitchell, was expected to meet separately with Netanyahu and Abbas, in a fresh push to resume their stalled negotiations.

Netanyahu was said to be seeking a package deal with Washington to delay further discussion on settlements by forging a Palestinian state with provisional borders in exchange for which Israel would avoid unspecified "provocations".

The package also called for Washington to agree to toughen its policies toward Syria and Iran, whose nuclear programme Israel sees as a threat to its existence, the newspaper said.

Syria and Iran give support to Hamas Islamist militants in control of the Gaza Strip, who reject any talks with Israel and have acted as spoilers in the peace process in the past, by launching rocket attacks at the Jewish state.

Netanyahu and U.S. President Barack Obama have been sharply at odds over Israeli settlement policy in the occupied West Bank, a territory Palestinians want for their state.

The Israeli leader wants to avoid harming ties with Israel's largest ally but yielding any ground to the U.S. or Palestinians could risk the rupture of his pro-settler ruling coalition.

CONFIDENCE BUILDING

Netanyahu still has not responded publicly to what political sources have said was a list of 11 "confidence-building" steps Obama demanded in talks last month in Washington, so as to coax Palestinians back to negotiations suspended since December 2008.

Abbas has insisted Israeli settlement building must cease before talks with Israel would resume.

Netanyahu reiterated on Thursday that he would not freeze settlement building in the area of East Jerusalem, land Israel captured in a 1967 war and annexed as part of its capital in a move not recognised internationally.

"Our policy in Jerusalem will not change," he told Israel's Channel Two television. "There won't be a freeze in Jerusalem ... Why do I need to give up on Jerusalem?"

In Washington, State Department spokesman P.J. Crowley said the decision to dispatch Mitchell was made after a round of conversations among senior U.S. officials and Israeli and Palestinian counterparts.

"We don't go to meet just to meet. We go there because we have some indication that both sides are willing to engage seriously on the issues," Crowley told a news briefing.

Palestinians were hopeful Mitchell may succeed in his so-far unsuccessful efforts to convene indirect talks with Israel that may later lead to direct negotiations.

"We hope (Mitchell) will have the right formula for resuming proximity talks by having Israel stop settlement activities," Palestinian Chief Negotiator Saeb Erekat has said.