* Mitchell launches talks with Israeli leaders * Settlement deal could lead to three-way meeting at U.N. * Netanyahu holds talks in Egypt with Mubarak * Mubarak calls on Israel to halt settlement activities (Updates with Netanyahu-Mitchell meeting postponed to Tuesday) By Jeffrey Heller JERUSALEM, Sept 13 (Reuters) - U.S. envoy George Mitchell said on Sunday he hoped to wrap up an agreement over the next few days in talks with Israeli and Palestinian leaders on a settlement freeze and a revival of peace negotiations. "While we have not yet reached agreement on many outstanding issues, we are working hard to do so, and indeed the purpose of my visits here this week is to attempt to do so," Mitchell said with Israeli President Shimon Peres at his side. Mitchell, who arrived in Israel on Saturday, has been trying to prepare a package under which Israel would freeze settlement construction in the occupied West Bank and Arab nations would take initial steps towards recognising Israel. Washington hopes both moves would lead to the resumption of Israeli-Palestinian peace talks suspended since December. Israeli Prime Minister Benjamin Netanyahu's office said the Israeli leader's meeting with Mitchell, originally scheduled for Monday, was postponed to Tuesday to allow Netanyahu to attend the funeral of an air force pilot killed in a training accident. Israel was plunged into mourning on Sunday after news of the death of Assaf Ramon, a young fighter pilot. He was the son of Israel's first man in space, the late Ilan Ramon, who was killed in the Columbia space shuttle disaster in 2003. [ID:nLD540543] Mitchell was also slated to hold talks on Tuesday with Palestinian President Mahmoud Abbas, who has said he would not restart peace negotiations unless Israel committed to a settlement freeze. "There is still work to be done," Netanyahu told reporters before flying to Cairo for talks with Egyptian President Hosni Mubarak. "Progress has been made on some issues and there are certain things in which we have yet to make progress." Netanyahu said he hoped he and Mitchell would be able to "narrow the gaps and perhaps to bridge them" in order to move forward in what he termed the "diplomatic process". During the meeting with Netanyahu, Mubarak called on Israel to stop all settlement activities and urged the resumption of talks with Palestinians, state news agency MENA reported. A statement from Netanyahu's office said the men "discussed the challenges facing the region and the need for all sides -- Israel, the Palestinians, Arab states and the international community -- to contribute their part to advancing the peace process". Analysts were sceptical that the meeting -- part of efforts to revive stalled peace talks -- would have much impact. "If you want to move to a real peace process, the U.S. administration has to lay out a vision for the final status and then force the parties to react to it," said Ezzedin Choukri-Fishere, a professor of international relations at the American University in Cairo. U.N. MEETING While Israeli officials have held out the prospect of a moratorium in new construction starts in settlements, Netanyahu has said the building of some 2,500 homes for Israelis in the West Bank would continue and that the city of Jerusalem would not be included in any settlement deal. The United States hopes an agreement on the settlement issue would pave the way for a meeting involving Netanyahu, Abbas and U.S. President Barack Obama on the sidelines of the U.N. General Assembly around Sept. 23. But Palestinian chief negotiator Saeb Erekat said Abbas would tell Mitchell there would be no compromise. "Israel must halt all settlement activities including natural growth," Erekat said. Some 500,000 Israelis live in settlements in the West Bank, land which Israel captured in a 1967 war and Palestinians seek for a state, and Arab East Jerusalem, which Israel has annexed as part of its capital in a move not recognised internationally. Palestinians, who number about three million in the West Bank, say settlements deprive them of land for a viable country and have called on Israel to meet its commitment, under a 2003 peace "road map" to freeze settlement activity. Stoking Palestinian anger and drawing U.S. condemnation, Israeli Defence Minister Ehud Barak approved last Monday 455 building permits in settlements. The move was widely seen in Israel as a bid to placate settlers before any freeze of construction starts. An Israeli government official said it was a step towards a "package" deal that could include "very severe limitations in the growth of settlements -- a possible moratorium". (Additional reporting by Ori Lewis and Alastair Sharp in Cairo, Editing by Elizabeth Fullerton) (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to http://blogs.reuters.com/axismundi)
Israeli air force cadet Assaf Ramon (R) stands with Israel's President Shimon Peres during a graduation ceremony at Hatzerim air base, southern Israel, June 25, 2009. Assaf Ramon, the pilot son ...
