JERUSALEM, Aug 22 (Reuters/Jeffrey Heller) - Israeli Prime Minister Benjamin Netanyahu said on Sunday reaching a peace deal with the Palestinians would be difficult but possible, acknowledging skepticism over whether talks starting next month could succeed.

In his first remarks to reporters since Israel and the Palestinians accepted on Friday an invitation by the United States and other powers to restart direct talks, Netanyahu said:

We want to surprise all the critics and skeptics. But to do that, we need a true partner on the Palestinian side.

I know there is deep skepticism. After 17 years have passed since the Oslo process, it's possible to understand why this skepticism exists, he said at the start of a cabinet meeting.

He made no mention of a potential stumbling block once the talks start in Washington on Sept. 2 -- the scheduled end about three weeks later of Israel's 10-month limited moratorium on Jewish settlement building in the occupied West Bank.

Achieving a peace agreement between us and the Palestinian Authority is difficult, but possible, he said.

Saeb Erekat, the chief Palestinian negotiator, said on Friday the Palestinians would pull out of the new talks if Netanyahu's government, which is dominated by pro-settler parties, announced new settlement construction.

Palestinian President Mahmoud Abbas, Erekat said, sent a letter to that effect on Sunday to the Quartet of Middle East peace brokers -- the United States, the European Union, the United Nations and Russia.

PRESSURE

Danny Dayan, a settler leader, told Reuters that Netanyahu should expect political pressure in Israel if he continued to restrict settlement construction.

If Netanyahu wants to extend the moratorium formally or informally, then of course we will use all the political leverage we have within the parliament, within the political system, within Israeli society, to override it, Dayan said.

Palestinians say they fear the settlements Israel has built on land captured in a 1967 war will deny them a viable state in the West Bank, Gaza Strip and east Jerusalem. Gaza is now under the control of Hamas Islamists opposed to the peace efforts.

The talks are the latest chapter in a peace process which, interrupted by several years of violence earlier this decade, has given Palestinians limited self-rule but no state.

The borders of the Palestinian state, the fate of Jewish settlements built on occupied land and the future of Jerusalem are among the tough issues negotiators will face.

Netanyahu proposes a demilitarised Palestinian state, with Israeli forces on its eastern border. He has said the future of settlements and other core issues can be raised in the talks.

Netanyahu, who had pushed for a move from US-mediated proximity talks that began in May to face-to-face negotiations without preconditions, said reaching a peace deal would require both sides to take the necessary steps.

He did not define them, and the term fell short of the pledge of painful compromises his predecessor, Ehud Olmert, voiced at the 2007 Annapolis Conference that launched Israeli-Palestinian peace talks, which yielded no deal.

Those negotiations were suspended before a Gaza war in 2008.

Netanyahu said he was coming to the Washington talks with a real desire to reach a peace accord while preserving Israel's national interests, primarily security.

If the Palestinian side proved to be a peace partner, he said, we can quickly achieve a historic peace agreement between the two peoples.

Speaking on Israeli Army Radio, Erekat said it was up to Netanyahu to prove he wants peace.

If he decides to continue the settlements on September 26, we are very sorry -- negotiations cannot continue, he said.