Aug 26 (Reuters) - Israeli Prime Minister Benjamin Netanyahu met U.S. President Barack Obama's Middle East envoy George Mitchell in London on Wednesday [ID:nLQ125411]. Here is the state of play on key issues affecting Israel and the Palestinians and the factors to watch in coming weeks: THE PEACE PROCESS More process than peace after two decades of talking, Obama is set on getting Netanyahu, who won power in March, to sit with Palestinian President Mahmoud Abbas and agree to a Palestinian state in the West Bank and Gaza Strip and settle disputes over control of Jerusalem and on the fate of Palestinian refugees from lands that became Israel in 1948 [ID:nLQ385379]. The three could meet at the U.N. General Assembly, around Sept. 23. While that might mark a formal resumption of talks, many diplomats are cautious and speak of October for a full return to negotiation. If Obama and Netanyahu compromise after a tense six months, Abbas will find it hard to shun talks. Key hurdle is U.S. and Palestinian demand that Israel freeze West Bank settlement [ID:nLQ641147]. Abbas, boosted by leadership elections [ID:nLB132647] in his Fatah party, conditions talks on a freeze. Netanyahu, whose coalition has strong pro-settler wing, wants to maintain "natural growth" in settlements Israel aims to annex in any final deal. Watch for a U.S.-Israel compromise on a freeze from six to 24 months with exemptions for ongoing projects. Netanyahu wants Palestinians to accept Israel as a Jewish state [ID:nLM619664]. Abbas rejects that. Obama unlikely to let row over that issue prevent at least a new start to negotiations. Obama is also pressing Arab states for goodwill gestures to Israel [ID:nLQ641663] to aid process. Little sign of those yet. Abbas also wants Israel to commit to negotiating final deal on core issues, not interim agreement [ID:nLG849705]. If talks resume, the outlines of a possible accord remain those of a decade ago, as do the elements of discord. The rift between Fatah and Gaza's Hamas Islamists [ID:nL27272], who are shunned by Israel and the West, is a further obstacle. Talk of Obama setting a goal of a deal in two years has been met with scepticism.Tighter control by Abbas of West Bank security [ID:nLV25201] and efforts to boost prosperity [ID:nLP334871] through easing Israel's occupation are seen by many as reducing risks of new violence. HAMAS AND ISRAEL Three years after seizing Israeli soldier Gilad Shalit in a border raid, Hamas [ID:nLF53592] may be about to hand him back, via Egypt, in return for hundreds of its own prisoners [ID:nLP255227]. Key date may be Jewish New Year on Sept. 18, which coincides with Muslim's ending Ramadan fast. Both are traditional times for goodwill gestures. Also, Netanyahu is in Berlin on Thursday, days after confirmation Germany is helping Egypt broker a deal. Both sides seem keen to settle but still bargaining hard over the number of Hamas prisoners (up to 1,400) and the number of hardcore detainees to be sent home or deported into exile. Any deal is likely to be in stages, with Shalit released to Egypt to stay until the bulk of Hamas prisoners is freed. Hamas also wants Israel to lift its embargo on Gaza and to have access to Egypt through the Rafah crossing, theoretically controlled by Abbas's government under international treaties. Israel says Hamas is rearming after January's Israeli offensive and wants Hamas ousted or rendered impotent in Gaza. Obama and his allies want Israel to ease the embargo to help Gazans. A successful prisoner swap, following months of relative calm on the Israel-Gaza border, could signal rapprochement. But positions need to shift further before any further breakthrough. As Gazans chafe under sanctions and Islamist rule, Hamas says it would negotiate a years-long truce with Israel. But it has not accepted Israeli and Western conditions that it renounce violence and accept Israel's right to exist. Hamas crushed an al Qaeda-aligned fringe group this month, highlighting opposition it faces from Islamists who scorn its local, nationalist agenda. HAMAS AND FATAH Yet again, the two groups missed a date on Aug. 25 in Cairo set by Egyptian mediators. The next key date is a possible meeting there after Eid al-Fitr holiday. It ends around Sept. 22. So far, there is little indication of changes of heart, though both sides accept the rift is weakening the common Palestinian cause. Each group accuses the other of lacking popular legitimacy and of oppressing its members in the territory each controls. With Hamas running Gaza, any talks on a Palestinian state focus on the West Bank, though Abbas will take pains to assert a state must include Gaza. He can use the international legitimacy accorded him to pressure Hamas's efforts to ease Gaza embargo. Fatah's first congress in 20 years bolstered Abbas's ability to present himself as leader of the PLO, which may play into the efforts to reconcile with Hamas. A further key date could come in October when, aides say, Abbas may announce presidential and parliamentary elections to be held early in 2010 -- elections which would be controversial unless Hamas and Fatah reconcile. ISRAEL AND THE ARABS Netanyahu has been keen to assert a common interest with both the United States and Washington's Arab allies against the possibility that non-Arab Iran may develop nuclear weapons. He has repeated his willingness to develop economic and other ties with the Arab world, which has made a Palestinian state and a fair deal for Palestinian refugees a condition of any accord. Factors to watch include any shift in policy in the region, such as a move by Iran's ally Syria to re-engage in negotiations with Israel and Washington, or Saudi interest in promoting a regional peace settlement. Israel has ruled out resuming mediated talks with Syria, insisting on direct negotiation. THE IRAN FACTOR Tension over Iran's purportedly civilian nuclear programme, which Netanyahu has vowed to prevent developing an atomic weapon, is a key source of uncertainty. Should Iran miss Obama's September deadline for accepting an offer to talk, Israelis will expect severe international sanctions on Tehran [ID:nN0982872]. For a detailed look at whether, when and how Israel might take unilateral action against Iran, click on [ID:nLG388200]. Netanyahu and his government have indicated that Iran and its nuclear facilities are a more pressing priority for Israel than settling the six-decade-old conflict with the Palestinians. (Writing by Alastair Macdonald; Editing by Michael Roddy) (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to http://blogs.reuters.com/axismundi)
Members of Hamas' security forces stand guard near a tunnel bombed by Israeli aircraft in Rafah in the southern Gaza Strip August 25, 2009. Israeli aircraft bombed a tunnel under the ...
Palestinian territories
