BEIT-UL-MOQADDAS (AFP) - Israeli and Palestinian leaders agreed to proceed with newly-revived peace talks that had stalled after just two sessions over Israeli settlements, officials on both sides said.

Israeli Prime Minister Ehud Olmert and Palestinian president Mahmud Abbas had what both sides said was a positive meeting, though Israel appeared to fall short of agreeing to demands to halt all settlement activity.
The leaders' first encounter since they re-launched negotiations at a U.S. conference a month ago came two weeks before a planned visit to the region by U.S. President George W. Bush and a day after both men talked by phone with U.S. Secretary of State Condoleezza Rice in a bid to unblock the stalemate.
""Both parties agreed not to take any steps that may preempt or prejudice the issues reserved for the permanent status negotiations,"" senior Palestinian negotiator Saeb Erakat told reporters afterward, adding that these included Bei-ul-Moqaddas, settlements, borders, water, refugees and security.
Ahmed Qorei, the head of the Palestinian negotiating team who attended the meeting said: ""there will be measures taken on the ground to implement (Israeli) engagements under the roadmap.""
The 2003 internationally drafted roadmap peace blueprint -- which both sides pledged to uphold when they relaunched talks at the U.S. conference -- calls on Israel to halt settlement activity and on Palestinians to improve security.
A senior Israeli official briefing reporters afterward also struck a positive note, saying ""the issues that have stalled the talks have been defused.""
""Both sides have agreed that neither party would take steps that would compromise the ability to reach a final agreement and that will not prejudice the outcome of the talks,"" he said.
But while Olmert reiterated that Israel would not build new settlements or appropriate new land for settlements, he ""did not promise to freeze tenders that have already been published"" and said Israel could construct on any vacant lots in existing settlements, he said.
The Palestinians had been demanding Israel stop all settlement activity and talks stalled amid anger over two settlement expansions in annexed east Beit-ul-Moqaddas and the occupied West Bank that were announced after the U.S. conference.
Abbas had labeled continuing Israeli settlement activity the greatest obstacle to the Middle East peace process, revived last month after a near seven-year freeze.
In his phone call with the U.S. secretary of state late Wednesday, Abbas ""pressed Rice to encourage Israel to freeze its settlement policy which is an obstacle on the path to peace negotiations,"" his spokesman said.
In her conversation with Olmert, Rice said she aimed ""to encourage the sides to bridge their gaps and to make sure there was no breakdown in the talks,"" said a senior Israeli official.
Among the announced settlement expansions was enlargement of Har Homa, known to Palestinians as Jebel Abu Ghneim, just north of Bethlehem and south of the Green Line, the armistice line established after the 1948 Arab-Israeli war.
Israel does not consider the Har Homa project to be a settlement because it lies within the expanded municipal boundaries of Beit-ul-Moqaddas drawn up by Israel after it captured and annexed the city's Arab eastern half in 1967.
But the international community has never recognized the annexation, and Palestinians have demanded that east Beit-ul-Moqaddas be the capital of their future state. The international community considers all Israeli settlements illegal.
The two sides pledged to aim for a final deal by the end of 2008 when they revived their negotiations in Annapolis.