WASHINGTON, March 23 (Reuters) - Israeli Prime Minister Benjamin Netanyahu said on Tuesday he feared Middle East peace talks could be delayed for another year unless Palestinians dropped their demand for a full settlement freeze.

We must not be trapped by an illogical and unreasonable demand, Netanyahu told US Congressional leaders during a Washington visit, according to his spokesman. It could put the peace negotiations on hold for another year.

The Palestinians retreated from their agreement to begin indirect, US-mediated peace negotiations with Israel two weeks ago after it announced plans to construct 1,600 homes for Jews in an area of the occupied West Bank annexed to Jerusalem.

Face-to-face peace talks have been suspended since December 2008.
The new housing project also touched off the most serious spat between Israel and Washington since US President Barack Obama took office last year.

Netanyahu made his comments at a meeting on Capitol Hill with leading Democrats and Republicans several hours before he was due to hold low-profile White House talks with Obama.

Israeli officials dismissed Palestinian concerns over Israeli settlement in and near East Jerusalem, territory Israel captured along with the West Bank in the 1967 Middle East war.

They said even Palestinians understood that apartment blocs Israel erected for Jews across occupied areas of the city could not be dismantled in any future peace deal.
Palestinians want East Jerusalem as the capital of a state they seek in the West Bank and the Gaza Strip.