Washington is trying to circumvent the obstacle posed by the settlement freeze in the Israeli-Palestinian peace talks, and has devised a compromise which will allow the sides to make progress on other issues.

The London-based Arabic-language al-Sharq al-Awsat newspaper reported Thursday that US Secretary of State Hillary Clinton has suggested a compromised according to which Israel will prolong the settlement freeze by three months and the time period wil be used by both parties to reach an agreement on the border issues.

The Prime Minister's Office responded to the report by saying that there was no change in Benjamin Netanyahu's stand on the matter.

"We will not comment on the content of the negotiations," the PM's Office said in a statement. "Prime Minister Benjamin Netanyahu's stance on the period set in advance for the suspension of new construction in Judea and Samaria is well known and has not changed."

According to the report, once new borders are set, Israel will be able to resume its settlement activity in the areas remaining under its control; and will cease all activities in areas it is expected to withdraw from.

Al-Sharq al-Awsat said Palestinian President Mahmoud Abbas had accepted the offer, while Prime Minister Netanyahu had yet to give his answer.

American sources close to Clinton's delegation said they believed this offer had the best chances of preventing a deadlock in the talks.

Palestinian President Mahmoud Abbas has already threatened to walk away from the negotiating table should Israel resume its settlement activity, when the current freeze ends, on September 26.

Abbas' statement reportedly followed a previous one by Netanyahu, saying settlement activity will resume as planned.