PARIS- Israeli Prime Minister Benjamin Netanyahu said on Wednesday he hoped to reach an understanding with Washington over Jewish settlements in the West Bank, but an Israeli official predicted the dispute would be hard to resolve.

Echoing U.S. President Barack Obama, France's Nicolas Sarkozy urged Netanyahu to build up trust with the Palestinians by ordering a complete freeze on settlements, a statement from the French president's office said.

After meeting Sarkozy in Paris, Netanyahu reiterated his intention to continue to build within existing settlements in the West Bank to accommodate the natural growth of families.

Netanyahu, who heads a right-leaning government that could be fractured if he agrees to a settlement halt, told reporters differences could occur among the best of friends.

Western diplomats said the abrupt cancellation of Netanyahu's planned meeting in Paris on Thursday with Obama's Middle East envoy, George Mitchell, underscored the difficulty both sides faced in narrowing the rift.

Mitchell will meet instead with Israeli Defence Minister Ehud Barak in Washington next Monday. I asked for the postponement of the meeting, Netanyahu said about the talks he had planned to hold with Mitchell in the French capital.

Mr. Mitchell agreed immediately. We believed we had to clarify several issues and statistics. The defence minister will do this on Monday in the United States, Netanyahu said.

We will continue the contacts, with goodwill and with the intention of reaching understanding that will advance a peace process -- a diplomatic process between us and the Palestinians, and I hope between us and the rest of the Arab world.

Senior Israeli officials, speaking on condition of anonymity, said Netanyahu sought understanding with the Obama administration that would allow construction already under way in settlements to go forward.

One senior official who travelled with Netanyahu to Paris said a lot of hard work would be necessary to reach common ground with the United States, which also advocates creation of a Palestinian state.

Netanyahu says such a country must be demilitarised and recognise Israel as a Jewish state, conditions Palestinians reject.

JOINT DECISION

In Washington, U.S. State Department spokesman Ian Kelly said the Mitchell-Barak meeting was a joint decision and talks between Netanyahu and the envoy had not yet been rescheduled.

The rare clouds in the U.S.-Israeli relationship seemed to overshadow Netanyahu's three-day visit to Europe, which also included talks in Rome, where Italian leaders prodded him to resolve the dispute.

In lieu of a full settlement freeze, Netanyahu has said he would not build additional enclaves in the territory, captured by Israel in a 1967 war and which Palestinians seek for a state.

Palestinian President Mahmoud Abbas has ruled out restarting peace talks with Israel until Netanyahu commits to a full settlement freeze under a 2003 U.S.-backed peace road map.

Israel has sought to ease tensions over settlements by committing to remove more West Bank roadblocks and settler outposts built without Israeli government permission.

In Cairo, Arab League Secretary General Amr Moussa said after a meeting of Arab foreign ministers that there would be a big catastrophe in the peace process if settlement activity did not stop.

(Additional reporting by Deborah Charles in Washington; Writing by Jeffrey Heller and Adam Entous in Jerusalem; Editing by Matthew Jones)

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