BETHLEHEM, West Bank - Renewed peace talks between Israel and the Palestinians must tackle core issues including Jerusalem, Middle East envoy Tony Blair said, raising the specter of a clash with Prime Minister Benjamin Netanyahu.

Unless you're dealing with the core issues, then the negotiation, I don't know what it's about, Blair, envoy for the Quartet of Middle East mediators, the United States, the European Union, the United Nations and Russia, told Reuters on Thursday. It will be the substance that matters.

Blair's remarks were the strongest signal yet by the Quartet that it would pressure Netanyahu to resume negotiations on final-status issues -- the borders of a Palestinian state as well as the fate of Jerusalem and Palestinian refugees.

Netanyahu's main right-wing and ultra-Orthodox coalition partners oppose negotiations on the core issues, underscoring the difficult balancing act he faces in trying to satisfy Western demands for substantive peace moves without triggering an internal backlash that could destabilize his government.

Netanyahu, who met Blair on Wednesday, has been vague in public about the scope of any future peace talks with Palestinian President Mahmoud Abbas, whose Western-backed government holds sway in the Israeli-occupied West Bank.

This week, Netanyahu said he was ready immediately to begin negotiations on economic, security and political issues.

But he has so far refused to endorse a two-state solution, or to spell out whether political negotiations would include the core issues.

Netanyahu's office declined to comment on Blair's remarks, but a senior official said the Palestinians can bring to the table their concerns and we will bring to the table our concerns without preconditions.

Other senior Israeli officials said Netanyahu was deeply skeptical about moving to talks on core issues any time soon.

RIGHT-WING BACKLASH

Netanyahu's right-wing Likud party criticized then-Prime Minister Ehud Olmert's decision to restart talks on core issues at a peace conference in Annapolis, Maryland in November 2007.

The talks bogged down last year and broke off after Israel went to war in the Hamas-ruled Gaza Strip in late December.

U.S. President Barack Obama has made clear advancing Palestinian statehood would be a priority for his administration, but he has yet to say how he intends to do so.

Western diplomats said Netanyahu's right-leaning coalition was more stable than Olmert's centrist government, giving the new prime minister some room to maneuver.

But the same right-wing parties which bogged down Olmert's peace talks and weakened him politically have gained ground and now hold more powerful positions in Netanyahu's cabinet.

Blair said the international community hoped to settle on the future course for the peace process following Netanyahu's meeting with Obama in Washington on May 18.

Over the next few weeks we will see, I think, pretty clearly, what the shape of the plan going forward is going to be, the former British prime minister said.

Diplomats said the Quartet planned to meet mid-June.

After meeting Blair, Netanyahu named a ministerial committee on developing the Palestinian economy and improving their quality of life. His office said he would chair it himself.

We want the development of the economy ... but it's not a substitute for statehood, Blair said on a tour of Bethlehem.

A large part of Bethlehem is not developed, Blair said, owing to physical and legal restrictions imposed by Israel.

His Palestinian hosts said the city, which Pope Benedict will visit during a May 8 to 15 pilgrimage to the Holy Land, was being slowly strangled by Israel's barrier in the West Bank, and pointed to a nearby Israel settlement where Blair saw construction going on.

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