Palestinian President Mahmoud Abbas said on Tuesday he was ready to engage with Prime Minister Benjamin Netanyahu on a Middle East peace agreement if he proposes "anything promising or positive."

Abbas, speaking to Reuters after Netanyahu announced a grand coalition that will strengthen the Israeli leader's hand, said Netanyahu had to realize that Israeli settlements in the West Bank were destroying hopes of peace and must cease.

Abbas said it was still too early to comment directly on the new Israeli coalition, which saw Israel's centrist opposition Kadima party join Netanyahu's government.

While in opposition, Kadima had blamed Netanyahu for the failure of Palestinian peace talks. Kadima leader Shaul Mofaz said resuming negotiations that have been stalled for 18 months was an "iron condition" of his decision to join the government.

Abbas sent a letter last month to Netanyahu that was widely viewed as an ultimatum, setting out parameters for the stalled talks to resume. Netanyahu is expected to reply this week.

Abbas said he had no intention of letting his people take up arms against the Israelis, but he would be ready to renew his unilateral push for international recognition of statehood at the United Nations if there was no breakthrough.

"If there is anything promising or positive of course we will engage," he said, speaking in his headquarters in Ramallah, the administrative capital of the Palestinian Authority.

He predicted the United States might also try to bring fresh ideas to the table. U.S.-brokered talks broke down in 2010 in a dispute over continued Israeli settlement-building in the West Bank.

"If nothing happens, at that time we will go to the United Nations to get non-member status," he said, referring to a possible vote in the UN General Assembly.

Palestinian efforts to get full recognition via the UN Security Council failed in 2011 in the face of U.S. opposition. The General Assembly cannot grant full UN membership, but a Palestinian initiative there cannot be vetoed by Washington and a successful vote would offer a symbolic victory.

Settlement Block

Speaking in nearby Jerusalem earlier on Tuesday, Netanyahu said he wanted to use his enlarged coalition to "advance a responsible peace process".

However, there was no indication he was ready to accept Palestinian calls for all settlement building to halt before negotiations could re-start. Netanyahu says halting settlement building would be a pre-condition and there should be no preconditions to talks.

Abbas reiterated the demand on Tuesday. "I will not return to the negotiations without freezing settlement activities," he said, enunciating each word to give with added emphasis.

About 500,000 Israeli settlers and 2.5 million Palestinians live in the West Bank and East Jerusalem. Palestinians want the territory for an independent state along with the Hamas-controlled Gaza Strip.

The settlements are considered illegal by the International Court of Justice, the highest UN legal body for disputes.

"Settlements are destroying hope," said Abbas, who has been involved in Palestinian politics since the 1950s and who replaced the late Yasser Arafat as president in 2005.

It is a gloomy time for Palestinian peace makers. In a separate interview earlier on Tuesday, Abbas's Prime Minister Salam Fayyad told Reuters Israel was succeeding in persuading the international community to ignore the Palestinian plight.

"I think we are losing the argument, if we have not already lost the argument, but that doesn't make our position wrong," said Fayyad. "The Israelis have managed to successfully trivialize our argument."

Whereas Arafat was flamboyant and mercurial, striding the world stage in army fatigues, Abbas cuts a low-key figure, opting for suits and ties, and presenting a much more moderate face of Palestinian nationalism.

Calling in an aide to light his slender cigarettes, Abbas saw his main success as leader was in reining in violence.

"My legacy? I have one thing, security," he said, adding that after two failed uprisings, known in Arabic as Intifadas, no one wanted to see further bloody confrontations with Israel.

"Ask anyone if we are going to the third Intifada. They will say no, they want peace. That has never happened before. People realized that through peaceful means we can achieve our goals."

He rejected calls from some Palestinians that he should dissolve the PA, which exercises limited self-rule in the West Bank, and oblige the Israelis to take control of all the territory, which would be costly and tie up huge manpower.

But he indicated that he had other options up his sleeve, without going into details. Some leading figures have suggested that he should end all security cooperation with Israel in the West Bank and Abbas said a future leader might be less amenable.

"Suppose I leave and suppose someone else comes and says 'no, this policy is rubbish'," he said, sitting beneath a large color photograph of the golden Dome of the Rock, an Islamic shrine within the walled old city of Jerusalem.

The 77-year-old recognized that the peace process was "jammed" and acknowledged that the situation was depressing. He added that although the Israelis appeared in no hurry to reach a peace deal, they could not afford to tarry.

"Now they are wasting time. Now is a good situation for them, but no one knows what will happen in the future. Peace is essential for the Israeli future," he said.