RAMALLAH, West Bank, May 9 (Reuters) - The Palestinians declared on Sunday the start of indirect talks with Israel mediated by the United States, the first Middle East peace negotiations in 18 months.

Echoing a call by Washington for a future move to direct negotiations -- and reflecting low public expectations for progress -- Israeli Prime Minister Benjamin Netanyahu said peace would be impossible to achieve without face-to-face contacts.

If he (Netanyahu) announces a complete halt to settlement building, there will be direct talks, Palestinian chief negotiator Saeb Erekat told Voice of Palestine radio.

Netanyahu, who heads a coalition government dominated by pro-settler parties, has rejected a total construction freeze.

The settlement standoff forced US Middle East envoy George Mitchell to search for a new way to conduct talks between sides whose negotiations have mostly been face-to-face since the start of the Middle East peace process in the early 1990s.

Palestinian consent to the talks marked a breakthrough, albeit modest, for US efforts to revive the peace process.

Mitchell has not made any public comments since the Palestine Liberation Organisation (PLO) approved four months of indirect negotiations on Saturday. The Palestinians say the talks would focus initially on borders and security.

Erekat, speaking after Palestinian President Mahmoud Abbas met Mitchell in Ramallah on Sunday, said: I can officially declare today that the proximity talks have begun.

US ASSURANCES

The Palestinians aim to establish a state in the West Bank and Gaza Strip with East Jerusalem as its capital.

Israel captured those areas in a 1967 war and regards all of Jerusalem as its capital, a claim that has not won international recognition.

Netanyahu said the indirect talks with the Palestinians would begin without preconditions, an apparent reference to US and Palestinian demands to curb construction of homes for Jews in and near East Jerusalem.

But no new Israeli housing projects in East Jerusalem have been approved since March, raising speculation he has imposed a de facto moratorium that could keep negotiations ticking while avoiding a showdown with far-right coalition partners.

Addressing his cabinet, Netanyahu said in public remarks: The proximity talks must bring about direct talks soon. Peace cannot be brought about from a distance, or with a remote control.

The initiative was going ahead after US plans for indirect talks were stymied in March, when Israel angered Washington and the Palestinians by announcing during a visit by Vice President Joe Biden that it would build 1,600 new settler homes in and around East Jerusalem.

The Palestinians say the United States has given assurances it will take action if either side does anything that derails the talks. The Palestinians take that to mean a guarantee Israel will not announce new settlement work.

Israel's anti-settlement Peace Now group said renovation work recently began for the construction of 14 housing units in an old Israeli police station in East Jerusalem's Ras al-Amud neighbourhood.

Peace Now said renovations within the former station did not require municipal building permits -- official approval that could torpedo the new peace negotiations.

Some 50 Jewish families currently live in six buildings in Ras al-Amud, where an American Jewish millionaire has purchased land for Jewish settlement.

Mitchell planned to return home later on Sunday and Israeli government sources said he would be back in the Middle East in about 10 days.