JERUSALEM - A U.S. official denied an Israeli newspaper report on Wednesday that Washington had agreed to the continued construction of 2,500 housing units in Jewish settlements in the West Bank, despite its calls for a freeze.

The report in Israel's Maariv daily followed Defence Minister Ehud Barak's talks in London on Monday with U.S. envoy George Mitchell on ending a rift with Washington over its demand to stop the building in land that Palestinians seek for a state.

Asked in Washington whether the report was true, State Department Spokesman Ian Kelly replied: No, that report in the Israeli media outlet is incorrect.

Our bottom line is -- is the same. It has not changed. And that's that all parties in the region have to honour their obligations. And you know what our position is regarding settlements. This activity has to stop, Kelly said.

Kelly said Barak and Mitchell held good, productive discussions and that the U.S. envoy would head to Israel soon but that he had no firm date yet for that visit.

Spokesmen for Israeli Prime Minister Benjamin Netanyahu said they had no comment on the report.

Israeli government spokesman Mark Regev said the United States and Israel had been trying to find common ground on the settlement issue.

Uzi Arad, a political aide to Netanyahu, said Israel was pressing Washington to respect understandings referring to agreements Israel says it procured with the administration of President Bush to permit building inside existing settlements.

There is still discussion on this issue, Arad told reporters at a briefing.

Western officials said the United States was moving in the direction of making allowances so Israel could finish off at least some existing projects which are close to completion or bound by private contracts that cannot be broken.
Israel estimates that 2,500 units are in the process of being built and cannot be stopped under Israeli law. Maariv reported the units are in 700 buildings in various settlements and that Washington had agreed to their completion.

Barak has been seeking a deal with the United States that would include initial steps by Arab states to normalise relations with Israel in return for limiting settlement activity.

Palestinian leaders have said U.S.-backed peace negotiations with Israel could not resume unless there was a complete halt to settlement activity in the West Bank, Israeli-occupied territory where they hope to establish a state.

While in London, Barak told reporters that he presented to the Americans the scope of current construction work, which from a practical point of view can't be stopped.

Netanyahu, under U.S. pressure, has pledged not to build new settlements in the West Bank or expropriate more land.

(Writing by Jeffrey Heller and Ori Lewis; Additional reporting by Adam Entous and Allyn Fisher-Ilan; Editing by Charles Dick)

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