MARRAKESH, Morocco - U.S. Secretary of State Hillary Clinton said on Monday Israel must do more to get peace talks with the Palestinians on track, countering Arab accusations she had given in to Israel over settlements.

Clinton, who is meeting Arab foreign ministers in Morocco on Monday, is likely to be told they are disappointed she did not exert more pressure to freeze settlement expansion when she met Israeli Prime Minister Benjamin Netanyahu last week.

Arab League Secretary-General Amr Moussa, who is also in Morocco, said earlier on Monday he feared U.S. President Barack Obama's drive to restart Israeli-Palestinian peace talks could be heading for failure over the settlement issue.

The Israelis have responded to the call of the U.S., the Palestinians and the Arab world to stop settlement activity by expressing a willingness to restrain settlement activity, Clinton told reporters.

This offer falls far short of what our preference would be but if it is acted upon it will be an unprecedented restriction on settlements and would have a significant and meaningful effect on restraining their growth.

Clinton also praised Palestinian President Mahmoud Abbas for positive steps he was taking toward talks, including improving security on the West Bank, and she said that Israel should reciprocate.

When either party takes any step that looks like it moves us in the right direction, even if it is not what I would like or I would prefer, I am going to positively reinforce that, Clinton said.

ARAB DISAPPOINTMENT

Clinton was in Morocco to begin sounding out Arab officials after a meeting with Netanyahu in Jerusalem at which she endorsed Israel's view that settlement expansion in the West Bank should not be a bar to resuming negotiations.

The Arab League chief said Arab states shared the Palestinian position that resuming negotiations was futile without a freeze on settlement expansion.

I am telling you that all of us, including Saudi Arabia, including Egypt, are deeply disappointed ... with the results, with the fact that Israel can get away with anything without any firm stand that this cannot be done, Moussa told reporters.

Asked if Obama's initiative to restart the Israeli-Palestinian peace process had failed, he said: I still wait until we have our meetings and decide what we are going to do. But failure is in the atmosphere all over.

Clinton was to hold a bilateral meeting with Saudi Foreign Minister Prince Saud al-Faisal in Morocco as well as group meetings with Gulf Arab ministers and officials from Egypt, Jordan and Iraq on the sidelines of a conference.

After Clinton's visit to Jerusalem, Palestinians accused the United States of back-pedaling on settlements and said a resumption of Israeli-Palestinian talks was not in sight.

Clinton's comments in Jerusalem underscored a shift in U.S. policy that began in September, when U.S. President Barack Obama himself called only for restraint in Israeli settlement activity rather than the freeze he had earlier demanded.

Netanyahu has proposed limiting building for now to some 3,000 settler homes already approved by Israel in the West Bank. He does not regard building in occupied East Jerusalem, annexed in defiance of international opposition, as settlement.

Palestinian leader Abbas faces intense domestic pressure from Hamas Islamists who control the Gaza Strip, and any compromise on settlements could hurt him politically in a run-up to Palestinian elections he has scheduled for January 24. Hamas has rejected holding a vote.

Some 500,000 Israelis live in the West Bank and East Jerusalem alongside 2.8 million Palestinians. Israel captured the territories in a 1967 war with its Arab neighbors. Palestinians say settlements could deny them a viable state.

(Additional reporting by Tom Pfeiffer in Marrakesh; Editing by Myra MacDonald)

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