Prime Minister Benjamin Netanyahu and U.S. Mideast envoy George Mitchell said yesterday that the two countries are nearing an understanding on settlement construction in the West Bank.

Netanyahu and Mitchell both reported progress after their meeting yesterday, but did not say how close they were to resolving the disagreement.

The two agreed to meet again in Israel next month.

On Monday Mitchell met Palestinian President Mahmoud Abbas in Ramallah, and told him there was still no agreement between the U.S. and Israel on freezing construction in the settlements.

Palestinian Authority newspaper Al-Ayyam reported yesterday that Mitchell told Abbas there is still a gap between the American administration?s demand for a total freeze and the Israeli position.

He promised Abbas that there would not be any surprises from Washington, and that they would consult the PA before making any decision on the matter.

The Arab language daily Al-Hayyat reported yesterday that a senior aide to Mitchell told Abbas that final status negotiations between Israel and the Palestinians would be limited to a year and a half.

Mitchell suggested the Palestinians start negotiations with Israel on the permanent solution without a total settlement freeze, and as part of negotiations, reach an agreement on the border separating the future Palestinian state from Israel, which would solve the settlement issue

"We are discussing the issue but we didn't conclude an agreement with the Israelis yet," a senior Palestinian official quoted Mitchell as saying over a working dinner with Abbas.

Netanyahu: An economic peace Netanyahu refused to answer questions on a possible settlement construction freeze during a visit to the Allenby Bridge yesterday. Instead, he talked about "economic peace" with the Palestinians.

In the absence of peace negotiations, Netanyahu tried yesterday to demonstrate progress in areas that do not require Palestinian cooperation, or significant concessions.

In the air-conditioned hall alongside several senior crossing officials, Netanyahu praised the the economic growth in the West Bank alongside the economic peace he is pushing. "It is not a replacement for the peace process," he said.

Several Likud ministers accompanying Netanyahu adopted Shimon Peres? vision of a new Middle East, which they had previously ridiculed.

Transportation Minister Yisrael Katz?s idea of a railway from the Allenby Bridge to Beit Shean and then the Haifa port seemed particularly detached from reality: ?It will encourage living here and boost our economic ties with Jordan. Maybe it will also help the Palestinians. Later we can connect the railway to Jenin,? added Katz.

Speaking at a graduation ceremony of the National Security College in Jerusalem yesterday evening, Netanyahu said, ?If the Palestinians in Gaza had the power to overthrow the government, they would. And I tell you, they will have that power.? He added that the Palestinian residents of Gaza wanted to replace the current Hamas government, and that they would eventually do so, Army Radio reported.