U.S. Secretary of State Hillary Clinton warmly endorsed Israeli and Palestinian leaders on Wednesday ahead of negotiations to try to break a deadlock over Jewish settlement building in the occupied West Bank.

"This is the time, and these are the leaders," Clinton said before she was to see Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas, who resumed direct peace talks two weeks ago after a 20-month hiatus.

Saying the two were "getting down to business" and tackling the main issues of the six-decade conflict, Clinton gave no sign they were any closer to resolving the dispute over Jewish settlement building that threatens the U.S.-brokered talks.

Speaking after she met Israeli President Shimon Peres, Clinton described Netanyahu and Abbas as sincere and serious and urged them to seize what she called "a moment of opportunity" despite deep pessimism about the U.S. goal of resolving the conflict's main issues within a year.

In the Gaza Strip, run by Hamas Islamists opposed to the peace efforts, Israeli aircraft bombed smuggling tunnels under the Egyptian border, killing a Palestinian, after militants fired a rocket and mortar bombs at Israel.

Netanyahu and Abbas resumed direct dialogue in Washington on Sept. 2, met again with Clinton in Sharm el-Sheikh, Egypt on Tuesday, and will hold a third three-way meeting on Wednesday in Jerusalem.

"Yesterday (the opening) in Sharm el-Sheikh was much better than all the pessimists and sceptics (anticipated)," Peres said. "I don't believe that you can solve the problems in one or two or three meetings, but it was an opening."

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A 10-month Israeli moratorium on new housing construction in West Bank settlements expires on Sept. 30 and Palestinians have said they would quit the negotiations if building resumes.

Palestinians say the settlements, built on land they want for a state, would deny them a viable and contiguous country.

Netanyahu, whose coalition government is dominated by pro-settler parties, said Sunday he would not extend the construction moratorium but could limit the scope of further building in some settlements.

Squaring that circle is Clinton's main task over the next two weeks if U.S. President Barack Obama's peace-making effort, launched before November U.S. congressional elections in which his fellow Democrats face possible big losses to Republicans, is not to fail almost before it has begun.

Clinton later held talks at her Jerusalem hotel with Palestinian Prime Minister Salam Fayyad, who aims to build the key institutions of a Palestinian state by mid-2011, and with Israeli Foreign Minister Avigdor Lieberman, who heads a party that opposes curbs on Jewish settlement building.

While Abbas and Netanyahu failed on Tuesday to find a compromise over the settlements, U.S. Middle East envoy George Mitchell said they discussed several core issues and were convinced a deal was possible within a year.

The status of Jerusalem, the fate of Palestinian refugees, the borders of a future Palestinian state and security arrangements are the main issues that the two leaders would have to resolve to secure a permanent peace deal.

The settlements are on territory captured by Israeli forces in the 1967 Middle East war and are deemed by the World Court to be illegal under international law, a finding disputed by Israel.

In the talks in Jerusalem, Netanyahu will first meet separately with Clinton and Abbas will join them later for a three-way meeting that will also be attended by Mitchell.