CAIRO - U.S. Secretary of State Hillary Clinton said on Wednesday that Washington does not accept Israeli settlement activity as legitimate but believes that resuming peace talks is the quickest way to achieve a freeze.

Clinton, facing Arab criticism over a perceived U.S. tilt toward Israel on the issue of settlements in the occupied West Bank, said Washington's stance on the issue had not changed.

The remarks were received positively by regional ally Egypt, which wants a focus on the end-game of a Palestinian state.

We do not accept the legitimacy of settlement activity and we have a very firm belief that ending all settlement activity, current and future, would be preferable, Clinton said after meeting Egyptian President Hosni Mubarak in Cairo.

Getting into final-status negotiations will allow us to bring an end to settlement activity, she added.

Cairo was Clinton's last stop on a regional tour in which she faced Arab frustration over signs that U.S. President Barack Obama's administration no longer backs Palestinian demands that Israel immediately stop building settlements in the West Bank.

The Egyptian vision is that we have to focus on the end-game, and we should not waste time to get stuck on this issue or that issue in order to start negotiations. We focus on the end-game, Egyptian Foreign Minister Ahmed Aboul Gheit said.

Arab discontent had flared after Clinton endorsed Israel's view that settlement expansion should not be a bar to resuming peace talks, in contradiction to the Palestinian position.

The Arab League then said resuming talks would be futile without a settlement freeze.

Aboul Gheit had earlier deferred judgment on the U.S. stance, but said Egypt wanted assurances that any Israeli-Palestinian peace negotiations would ensure Palestinian statehood and not be used to waste time.

NO IMPOSITION

Clinton also has said an Israeli offer to show restraint on settlements falls short of U.S. expectations.

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

Clinton, who said the talks in Egypt were constructive and positive, said Palestinians did not need to accept whatever Israel put forward, but should be willing to talk.

The Israelis are offering this. It can be rejected by everyone. There is no imposition, Clinton told reporters.

A senior Obama administration official said the U.S. push for talks was aimed in part at holding both Palestinians and Israelis accountable -- noting that thus far most pressure had been on the Palestinians to agree to talks.

Washington felt it was time to see what Netanyahu envisioned when he offered to negotiate immediately, the administration official said, adding: We'd like to test that proposition. We'd like to see what he brings to the table.

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

We want to assure you that our goal is a real state with real sovereignty, with the kind of borders that will enable the people of Palestine to make decisions about where they live and what they do on their own, Clinton said.

Her visit to Egypt followed a two-day stop in Morocco where she urged Arab foreign ministers to put aside recriminations and support moves to resume the talks, suspended since December.

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

(Additional reporting Cynthia Johnston; Writing by Alastair Sharp and Cynthia Johnston; Editing by Michael Roddy)

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