JERUSALEM, Oct 10 (Reuters) - Israel is not closing the door on a further freeze of new construction in West Bank settlements after the Palestinians, backed by Arab powers, gave Washington a one-month window to save peace talks from collapse.

Much could depend on whether the United States opts to sweeten incentives to Israel to agree to a proposed 60-day partial building moratorium, Israeli political sources said on Sunday.

Prime Minister Benjamin Netanyahu has resisted international calls to renew the freeze, which expired on Sept. 26, and the Palestinians say settlement building, on land they want for a state, must stop for now-suspended negotiations to resume.

This month will be fateful, Israeli Welfare Minister Isaac Herzog told reporters after Arab League foreign ministers, meeting in Libya, endorsed the Palestinian demand but gave the United States a one-month reprieve to rescue the peace process.

While the international spotlight was on the Arab forum, one of Netanyahu's confidants, Finance Minister Yuval Steinitz, was quietly meeting Dennis Ross, a senior White House adviser on the Middle East, in Washington.

The message Steinitz conveyed, the political sources said, was that a further freeze in settlements in the occupied West Bank would be very difficult -- but not impossible.

There has been little public sign of U.S. pressure on Netanyahu to bend, with President Barack Obama possibly wary of alienating pro-Israeli voters in the Nov. 2 mid-term election in which his Democratic party is expected to suffer steep losses.

Netanyahu, a senior Israeli official said last week, has already rejected a U.S. package of incentives, including security guarantees, that Washington hoped could help him overcome strong cabinet opposition to a new moratorium.

The proposals included U.S. backing for Netanyahu's demand for an Israeli military presence along the Jordan river, the likely eastern border of a future Palestinian state.

But Israeli leaders balked at what the political sources said was the package's vague timeframe for the troop deployment, which Palestinians oppose.

It spoke only of a prolonged military presence, while Israel wants the United States to stipulate that Israeli soldiers will remain on the frontier for 30 to 40 years, the sources said.

SETTLEMENT SUPPORT

For some cabinet members, the sources added, even the mention of a Jordan River border line for a Palestinian state was problematic, fearing it would be interpreted as Israeli agreement to relinquish settlements in the adjacent Jordan Valley, part of the West Bank.

Netanyahu's coalition is dominated by pro-settler parties and the United States has acknowledged the political risks he faces in pressing ahead with talks with the Palestinians, who fear settlements will deny them a viable state.

What appeared to be trial balloons for U.S. incentives Netanyahu might be able to sell in the cabinet have already been floated in the Israeli media.

They include Obama's backing for a 2004 letter from President George W. Bush to Israeli Prime Minister Ariel Sharon suggesting that Israel could keep some settlements in a peace deal and the release of Jonathan Pollard, an American who pleaded guilty to spying for Israel and is serving a life term in a U.S. jail.

Contacts with the United States on the settlement issue are continuing, the sources said, with a proposed Oct. 21 Paris summit between Netanyahu and Palestinian President Mahmoud Abbas a possible opportunity to get peace talks back on track.

Israel also will be examining closely the results of the U.S. election to gauge their impact on Obama's presidency.

While the future of the peace talks remains uncertain, Israeli commentators have pointed to Netanyahu's backing of controversial citizenship legislation as a possible political tradeoff with far-right Foreign Minister Avigdor Lieberman to win his support for a settlement freeze.

The proposal promoted by Lieberman's Yisrael Beitenu party, Netanyahu's biggest coalition partner, was brought for cabinet approval on Sunday. It requires candidates for Israeli citizenship through naturalisation to pledge loyalty to Israel as a Jewish and democratic state.

Leaders of Israel's Arab minority say the legislation is racist.