JERUSALEM, Sept 12 (Reuters/Jeffrey Heller) - Israeli Prime Minister Benjamin Netanyahu ignored in public remarks on Sunday a nudge from US President Barack Obama to extend a partial settlement freeze on land Palestinians want as part of their future state.

Speaking to reporters, Netanyahu made no mention of Obama's remarks on settlements on Friday, focusing instead on a bedrock Israeli demand for Palestinian recognition of Israel as the state of the Jewish people in any peace accord.

Palestinian President Mahmoud Abbas, who has rejected Netanyahu's call, has threatened to pull out of just-renewed direct negotiations with Israel if it resumes construction in settlements in the occupied West Bank.

A 10-month moratorium on housing starts that Netanyahu imposed in West Bank settlements under US pressure to coax Palestinians back into peace talks expires on Sept. 30, according to a military order that put the freeze into effect.

It makes sense to extend that moratorium as long as the talks are moving in a constructive way, Obama said at a White House news conference in which he spoke of enormous hurdles facing the negotiations.

Netanyahu, who leads a governing coalition dominated by pro-settler parties, including his own, has given no public sign he will extend the freeze.

But in private comments on Sunday to ministers of his Likud party, he said -- without elaborating -- that there were middle-ground options on the moratorium issue, a participant in the meeting said on condition of anonymity.

Some cabinet ministers have raised the prospect of an informal freeze in which Defence Minister Ehud Barak could withhold approval of some projects in Israeli-populated areas of the West Bank, land captured in a 1967 war and still under military administration.

SUMMIT

Netanyahu will meet Abbas again on Tuesday, in Egypt, for another round of peace talks that US Secretary of State Hillary Clinton also will attend.

I hope that the Israeli government, given the choice between settlement and peace, will choose peace. They can't have both, chief Palestinian negotiator Saeb Erekat told Reuters when asked about Obama's comments.

In his remarks to reporters, Netanyahu voiced disappointment over the Palestinian position on a recognition demand that has been the focal point of his vision of a final peace agreement.

Unfortunately I am not yet hearing from the Palestinians the sentence 'two states for two peoples', Netanyahu said.

Palestinians have said they have already recognised the state of Israel in past declarations and in interim peace agreements that set the basis for establishing a state of their own in the West Bank and Gaza Strip.

This recognition is done, Erekat said.

But explicit recognition of Israel as a Jewish state, Palestinian officials have said, could jeopardise the claims of Palestinian refugees, who fled or were forced to flee Arab-Israeli fighting, to a right of return to homes in what is now Israel.

Looking ahead to the summit in Egypt's Red Sea resort of Sharm el-Sheikh, Netanyahu said he believed Israel and the Palestinians could achieve a framework peace agreement within the 12-month goal set by Washington.

But he said meeting that target would require a commitment by the Palestinian leadership to hold uninterrupted negotiations despite the obstacles arising on each side.