Washington has called for a complete freeze on Israeli settlement construction [Reuters]

In advance of a meeting with George Mitchell, the US Middle East envoy, on Sunday, Netanyahu said "there is still work to be done".

"Progress has been made on some issues and there are certain things in which we have yet to make progress," he said.

Mitchell has been trying to put together a package under which Israel would freeze its settlement construction in the West Bank and Arab states would make gestures toward recognising Israel.

Washington has called for a complete freeze, but the settlement issue has proved a major sticking point.

"I hope we will be able to narrow the gaps and perhaps to bridge them so that we can move forward in the diplomatic process," Netanyahu said.

Mahmoud Abbas, the Palestinian president, has said there can be no peace negotiations while Israel continues its West Bank settlement construction.

Mitchell and Abbas are due to meet in Ramallah on Tuesday.

Three-way meeting

The race is on to secure a deal for a possible three-way meeting at the UN General Assembly this month between Netanyahu, Abbas and Barack Obama, the US president.

Before his meeting with Mitchel, Netanyahu is due to travel to Cairo to meet Hosni Mubarak, the Egyptian president, for talks intended to focus on the peace process.

They were also expected to discuss Egypt's efforts to broker a prisoner swap between Israel and Hamas that would include the release of an Israeli soldier held by fighters in the Gaza Strip since 2006.

An official meeting in the Egyptian capital is unusual, Netanyahu's last meeting in Egypt was in Sharm el-Sheikh in May 2009.

Palestinian state

Against this backdrop, the Israeli Haaretz newspaper reported on Sunday, quoting European Union sources, that talks would start to determine a permanent border between Israel and the West Bank - an apparent "early recognition" of a Palestinian state.

Akivar Eldar, Haaretz's chief political columnist, said that such an understanding lay behind the recent proposals by Javier Solana, the EU foreign policy chief, and Salam Fayyad, the Palestinian prime minister.

"Behind the idea ... is that in any case after two years - if we [the parties] reach an agreement or if we are unable to reach one - there will be a declaration of some kind of a Palestinian independent entity," Eldar said.

Responding to the Haaretz report, Saeb Erekat, the Palestinians' chief negotiator, denied the intimation that talks were imminent.
 
"Israel releases this 'trial balloon', claiming we have agreed to resume negotiations," he said.
 
"However, I declare ... as the head of the Palestinian delegation to the final status negotiations, that these reports are baseless."

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