Israel and the Palestinians have virtually no chance of reaching a peace deal within the one-year target set by the United States, Israeli Foreign Minister Avigdor Lieberman said on Wednesday.

"I think there's room to lower expectations and get real," Lieberman, a far-right member of Prime Minister Benjamin Netanyahu's cabinet, told Israel Radio.

"There's no magic recipe ... that can bring us within a year to a permanent agreement resulting in the end of the conflict and the solution of all of the complicated issues, such as refugees, Jerusalem and Jewish settlement," he said.

Inviting Israel and the Palestinians last week to restart direct talks that have not been held since late 2008, U.S. Secretary of State Hillary Clinton said the United States believed all major issues could be resolved within a year.

The talks are set to begin in Washington next Thursday.

But the negotiations could swiftly hit a bump on Sept. 26, when a 10-month limited Israeli moratorium on new housing starts in Jewish settlements in the occupied West Bank expires.

Palestinian President Mahmoud Abbas, whose authority has extended only to the West Bank since Hamas Islamists took control of the Gaza Strip in 2007, has threatened to pull out of the talks if Israel presses ahead with settlement construction.

Lieberman voiced confidence that the Israeli cabinet would not extend the freeze -- agreed by Netanyahu under U.S. pressure to coax the Palestinians into direct talks -- and said projects for several thousand new settler homes could get under way fast.

The United States opposes settlement expansion but has stopped short of calling for Netanyahu to extend the moratorium, a move that could cause cracks in a governing coalition dominated by pro-settler parties including his own.

Instead, it has urged both Israel and the Palestinians not to take measures that could jeopardise the negotiations and said the settlement issue would be raised in next week's talks.

NEW PROJECTS

Acknowledging a de facto moratorium in East Jerusalem, which was not included in the formal freeze, Lieberman said 1,600 housing units for Israelis "have gone through all the approval processes".

Construction could also begin immediately on another 2,000 homes in the West Bank once the freeze ended, he said.

Dan Meridor, a moderate in the Israeli cabinet, has proposed resuming housing construction only in the major settlement blocs that Israel intends to keep in any future peace deal, which could include territorial swaps.

"This is my position -- it's not the government's position yet. I am mentioning it because we should discuss it and try to reach an agreement on it. We're not there yet," Meridor said in a radio interview on Tuesday.

Netanyahu, who has been on vacation in northern Israel this week, has not commented on Meridor's remarks.

The YESHA council, the main settler organisation, warned him in a letter that he could face trouble from its cabinet allies.

"If we are not given the legal right to actually build homes for our families and children, we cannot allow a situation where this coalition will continue to govern," the letter said.

Israel captured the West Bank and East Jerusalem in a 1967 war and has settled some 500,000 Jews in the two areas, where 2.5 million Palestinians live. Palestinians fear the settlements will deny them a viable state.