JERUSALEM - Israeli Prime Minister Benjamin Netanyahu gives a major policy speech on Sunday and will address the worst public rift with Washington in a decade over Jewish settlement building and Palestinian statehood.

Netanyahu was keeping a tight lid on details of the 8 p.m. (1 p.m. EDT) speech, cancelling his customary public remarks at the start of the weekly cabinet meeting.

Setting confrontation lines with Netanyahu, U.S. President Barack Obama said in a speech on June 4 aimed at repairing U.S. relations with Muslims that continued construction in Jewish settlements in the occupied West Bank was intolerable.

He also reaffirmed a U.S. commitment to the creation of a Palestinian state in the West Bank and Gaza Strip alongside a secure Israel, a goal set by a 2003 peace road map that also calls for a halt to all settlement activity.

The prime minister intends to articulate a clear view as to how he wants to move forward in the peace process with the Palestinians, said Netanyahu's spokesman Mark Regev.

His vision is to move forward toward a historic reconciliation, and it is clear that all parties must play a role if this process is to succeed, Regev said, referring to Netanyahu's call for peace with Arab countries in the region.

Netanyahu has rejected a settlement freeze, saying natural growth, which Israel describes as building within existing enclaves to accommodate growing families, will continue.

The Israeli leader, head of a right-leaning coalition government, has not publicly endorsed creating a Palestinian state, citing the continued rule of Hamas Islamists in Gaza.

We will indeed listen to the speech very carefully, Palestinian negotiator Saeb Erekat said. We hope that for a change the prime minister, Mr Netanyahu, will be clear, precise, focused and to the point.

NEGOTIATIONS

Palestinian President Mahmoud Abbas, himself at loggerheads with Hamas, has said talks with Israel cannot resume until Netanyahu halts settlement and accepts a two-state solution.

What's required from Mr Netanyahu is a yes or a no -- two states, accept agreements signed and to stop settlement activities including natural growth, Erekat said.

Few in Israel expect Netanyahu to give ground on settlements and risk the possible collapse of his government, even at the price of a continued division with Washington. But speculation was rife about how he would address the issue of statehood.

To sidestep the issue, Netanyahu could implicitly accept a two-state solution by stressing his government's acceptance of the road map as part of its pledge to honor diplomatic agreements signed by previous Israeli administrations.

But diplomats said this would not satisfy Washington.

The Israeli leader will also discuss Iran, officials said, whose nuclear aspirations the Jewish state regards as an existential threat. Newly re-elected Iranian President Mahmoud Ahmadinejad has called for Israel to be wiped off the map.

Iran denies seeking nuclear weapons and has so far shrugged off Western pressure to freeze its nuclear program.

(Editing by Peter Millership)

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