JERUSALEM, March 7 (Allyn Fisher-Ilan/Reuters) - Prime Minister Benjamin Netanyahu is formulating a plan to break a diplomatic deadlock by offering Palestinians some limited steps on the ground in the absence of direct peace talks, an Israeli official said.

The official, who spoke to Reuters on Monday on condition of anonymity, said Netanyahu had not abandoned Washington and Europe's goal of achieving a final status deal with the Palestinians, or a two-state solution of the conflict.

But he was now looking at what the official called a phased approach to achieving that goal, steps which Israeli media speculate may include a handover of more occupied West Bank land to Palestinian control, or a removal of some Jewish enclaves.

You can't achieve peace without negotiations but you can take steps on the ground that amount to a phased approach, said the official, who would not elaborate but also did not rule out the ideas broached by the media reports.

Israeli, Palestinian talks relaunched ceremoniously by Washington in September broke down weeks later on the issue of Jewish settlements built in West Bank land captured in a 1967 war where Palestinians want to build their state.

Israel has so far refused Palestinian President Mahmoud Abbas's demands that it cease all settlement construction so that negotiations may resume, insisting such requests amount to setting preconditions for peace.

Some Israeli officials worry the protracted diplomatic paralysis held the risk of straining Israel's ties with Western allies and igniting new violence in the region.

'SLIPPERY SLOPE'

What is certain that we cannot allow to continue is this (free fall), this slippery slope that leads almost inevitably to Israel's isolation, Defense Minister Ehud Barak told Israel Radio, adding he thought the country had to make a bold move.

Word that Netanyahu was looking at another peace plan surfaced last week but the only details reported suggested he was looking to achieve an interim rather than a final deal.

Palestinians rejected the idea outright. Saeb Erekat, a senior aide to Palestinian President Mahmoud Abbas, called it a reflection of the fact that we don't have a partner for the end game in this Israeli government.

The Israeli official speaking on Monday said Netanyahu's plan though not yet finalized would not supplant the goal of achieving a negotiated settlement, but stake out a more gradual approach to get there.

He saw turmoil engulfing much of the Arab world as a catalyst behind Netanyahu's plan. The Israeli leader felt Palestinian leaders who may feel threatened by the wave of unrest may grow less flexible toward Israel, raising the specter of new violence if diplomatic stalemate persisted.

Israel has also been concerned about reports of Palestinian plans to declare statehood unilaterally in the West Bank in the months to come, which could put Israel under greater pressure to yield them territory.

A handful of nations has already agreed to recognize such a state.

There's a growing understanding that Israel needs to take the initiative and break out of the current impasse and move the peace process forward, the Israeli official said.

The consistent refusal of the Palestinians to even come to the table has made a negotiated agreement all but impossible.

American lawmakers have asked Netanyahu to unveil his ideas soon before the U.S. Congress, the official said. The last Israeli prime minister to speak there was Ehud Olmert, in 2006.

Netanyahu was expected to next visit Washington in May for a meeting of the powerful Jewish lobby group, AIPAC, a frequent forum for policy speeches. But he could move up that trip if Congress were to offer a formal invitation, the official said.