JERUSALEM, Oct 24 (Reuters/Jeffrey Heller) - Prime Minister Benjamin Netanyahu urged the Palestinians on Sunday not to take unilateral steps towards statehood, saying Israel was working closely with Washington on ways to restart peace talks.

We expect the Palestinians to fulfill their commitment to hold the direct talks. I think that any attempt to circumvent them by going to international bodies is not realistic and it will not advance the real diplomatic process, he said.

Peace talks that began in Washington on Sept. 2 are in limbo over Palestinian demands for a freeze of Israeli construction on land they want for a state and Netanyahu's refusal to reimpose limits on building in settlements in the occupied West Bank.

The impasse has raised speculation the Palestinians might abandon negotiations with Israel and launch a diplomatic campaign to seek recognition of a Palestinian state by the United Nations or other international organisations.

Last week, Palestinian Authority spokesman Ghassan Khatib said that if peace efforts with Israel failed, Palestinian aspirations for statehood should not be held hostage to Israeli consent.

Peace will be achieved only through direct negotiations and I hope that we will return to this path with full force in the very near future, Netanyahu said, addressing his cabinet in public remarks.

He said Israel was engaged in close contacts with the United States aimed at restarting peace talks which the Palestinians suspended when a 10-month moratorium on housing starts in settlements ended on Sept. 26.

Diplomats have said Washington has offered Israel a package of incentives, including ideas on security, to persuade Netanyahu to resume the partial freeze for two months.

Our aim is not just to restart (talks) but to restart them in a way so that we do not stop in a few weeks or two months, Netanyahu said, calling for a year of serious negotiations about fundamental issues leading to a framework peace deal.

Palestinians say they fear settlements that Israel has built on land captured in the 1967 Middle East war will deny them a viable state. Netanyahu says the settlement issue should be discussed in negotiations and not serve as a condition for talks.