CAIRO - Israel's president said Sunday expanding Jewish settlements in the West Bank was a marginal issue blocking resumption of peace talks with the Palestinians.

But Egyptian President Hosni Mubarak, speaking at a joint news conference with Shimon Peres, said Israeli construction work on land captured in a 1967 war should stop and that Israel should take courageous decisions to push forward peace.

Egypt and other Arabs have blamed the United States for not doing enough to press Israel to stop settlement building work. Prime Minister Benjamin Nethanyahu says Israel must accommodate the natural growth of Jewish families in settlements.

The minute we shall start to negotiate there won't be new settlements, there won't be confiscation of land, Peres said on a visit to Egypt, the first Arab state to sign a peace treaty with Israel and which plays a mediation role in the conflict.

Palestinian President Mahmoud Abbas has said he would not renew negotiations with Israel unless it agreed to freeze settlement expansion. He has urged Washington to do more.

U.S. President Barack Obama has said Israel's approval of new construction was very dangerous because it would fuel Palestinian anger and threatened peace. But he has backed Israel's position that stopping should not be a condition for talks.

Peres, whose post is largely ceremonial, said the settlements issue was being blown out of proportion.

Unfortunately, it's a marginal issue, it is some building of houses that became a central issue for the wrong reasons. My answer is even this issue can be settled by negotiations and agreement, Peres said, calling for a swift restart to talks.

'PEACE STILL POSSIBLE'

Mubarak, who a day before Peres' arrival said Israel was creating new obstacles to peace, said it was a time for a brave move for peace from the Israeli leadership.

We want an end to settlement in occupied lands including East Jerusalem and to resume the negotiations about all the issues on the final status, from where they stopped, Mubarak said.

I say peace is still possible. The need is growing for the political will from Israel's side that is conscious of the regional situation and realizes the dangers of losing the peace opportunity and that it take courageous decisions needed, he said.

U.S. ally Egypt's mediation role has recently included involvement in a bid to secure the release of Gilad Shalit, an Israeli soldier held in Gaza, in exchange for Israel's freeing of hundreds of Palestinian prisoners.

The two leaders did not address that issue in their news conference despite mounting speculation that a deal could be concluded by the end of this month.

Before Sunday's talks, an Israeli diplomat said discussions were expected to cover Egypt's efforts to broker a deal between Abbas's Fatah group in the West Bank and Islamist Hamas, which controls Gaza. There has been little sign of progress.

(Additional reporting by Jeffrey Heller and Allyn Fisher-Ilan in Jerusalem; Writing by Edmund Blair; Editing by Jon Hemming)

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