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The U.S. administration is prepared to show flexibility on construction in West Bank settlements, a government source in Jerusalem says. The Americans will apparently not demand a full freeze on construction, but will agree that projects now underway can be completed, Israeli officials say.

A week from Thursday, Prime Minister Benjamin Netanyahu is to meet with U.S. special envoy George Mitchell in Paris to discuss the details.

The breakthrough came during Mitchell's visit to Israel last week, when he held a four-hour meeting on the settlement issue with Netanyahu and his advisers. He also discussed the matter for an hour and a half with Defense Minister Ehud Barak.

Mitchell said during the talks that at this stage the United States would not impose sanctions on Israel due to construction in the settlements. However, the U.S. would not be able to call on the Arab countries to make goodwill gestures to Israel unless Jerusalem moved to rein in construction.

Netanyahu and Barak told Mitchell that construction in the West Bank could not be totally halted because tenders had been issued and approved, construction had started and people had bought apartments.

A senior White House source did not deny that progress had been made on the matter. "We have managed to close the gaps," the source said. Netanyahu told American news outlets yesterday that he hoped the Obama administration would show understanding of Israel's needs regarding construction in the settlements.

Israel and the United States have been working on a way to define which construction would be allowed. The assumption in Israel is that the Americans will not relinquish their demand to freeze construction, but that they would be flexible when it came to building already underway. Discussions revolve around what the "point of no return" is regarding construction.

A government source in Jerusalem said the Americans understood that even if Netanyahu agreed to a full freeze, the government did not have the legal authority to force private construction companies to stop building. The source said that if an attempt were made to order a halt to construction, contractors or homeowners would appeal to the High Court of Justice and probably win.

American willingness to show flexibility on a settlement freeze comes after weeks of tension between Washington and Jerusalem on the issue. Tension heightened when the Obama administration announced that it did not recognize agreements between the Bush administration and the Sharon and Olmert governments regarding construction in the large settlement blocs. Secretary of State Hillary Clinton's statement that the administration opposed any kind of settlement construction garnered a great deal of attention.

Settlements also featured prominently yesterday in talks between Foreign Minister Avigdor Lieberman and 27 European Union foreign ministers in Luxembourg. Although senior EU figures did not work to stop the upgrading of relations with Israel, they said additional progress would depend on the peace process with the Palestinians. The announcement effectively stops the upgrading, at least until Israel and the Palestinians resume negotiations.

The EU foreign ministers held a few hours of consultations before their meeting with Lieberman, releasing a statement very critical of Israel afterward. France and Belgium led the criticism, and Netanyahu is likely to hear similar messages when he goes to Paris next week.

The ministers said in a statement they "welcomed the initial step" of Netanyahu's speech, but added it was not enough and that Israel had to unequivocally state its support for the two-state solution.

The EU "remains deeply concerned by settlement activities" and urged the Israeli government to "immediately end settlement activities, including in East Jerusalem and including natural growth," the statement said, reiterating the position that settlements are illegal according to international law and are an obstacle to peace.

The ministers also called on Israel to immediately open the crossings to Gaza to allow passage of people, humanitarian aid and merchandise. They also called for a cessation of violence on both sides.

Also yesterday, Netanyahu spoke by phone to world leaders about his speech at Bar-Ilan University on Sunday. Chancellor Angela Merkel praised him for his statements on a Palestinian state, as did British Prime Minister Gordon Brown.

Netanyahu also spoke to Egyptian President Hosni Mubarak, who earlier in the day had criticized Netanyahu's address, saying there would be no peace agreement without a solution to the refugee issue.