Israel has officially rejected US President Barack Obama's demand to suspend all construction in contested east Jerusalem, aides to Prime Minister Binyamin Netanyahu said Thursday.

The aides said Netanyahu delivered his government's position to Obama over the weekend, ahead of the scheduled arrival later Thursday of the US president's special Mideast envoy, George Mitchell. They spoke on condition of anonymity because the contact between the two leaders was private.

Washington had put Mitchell's shuttle diplomacy on hold for more than a month as it awaited a reply from Israel. The aides to Netanyahu provided no information on whether he had offered any other concessions to the Palestinians in an effort to restart the long-stalled talks.

But it appeared likely Israel tempered its rejection with other confidence-building gestures toward the Palestinians.

Science Minister Bennie Begin said it was "just impossible and unacceptable that people try to impress us that we should limit construction in Jerusalem."

"Jews and Arabs can live throughout the city," he said. "This policy will be retained."

US officials said that Netanyahu agreed to nearly a dozen other steps towards renewed negotiations, such as releasing some Palestinian prisoners from jail and removing more roadblocks in the West Bank, according to The Wall Street Journal.

Israel would also expand the responsibilities of the Palestinian security forces, and discuss borders and the status of Jerusalem in detail, said the report.

Netanyahu also reportedly agreed to stop construction in Ramat Shlomo for two years. Israel and the Palestinians had been set to launch US-mediated negotiations last month when Israel announced plans during a visit by Vice President Joe Biden to build 1,600 homes in a Jewish housing project in east Jerusalem. The Palestinians claim the city's eastern sector as capital of a future state.

Palestinian negotiator Saeb Erekat called the Netanyahu position "very unfortunate" and said he hoped the US "will be able to convince the Israeli government to give peace a chance by halting settlement construction in east Jerusalem and elsewhere."

Asked if anything short of an east Jerusalem construction freeze would bring the Palestinians back to the negotiating table, Erekat said it would depend on what Netanyahu told the Americans.

The government has debated proposals to free some of the thousands of Palestinian prisoners held in Israeli jails, turn over more West Bank territory to the control of Palestinian security forces and possibly curb Jewish construction in the heart of Arab neighborhoods in east Jerusalem.

Netanyahu's spokesman, Mark Regev, said Israel was exploring ways to restart talks, but refused to elaborate.

A Palestinian official said Mitchell was expected to meet separately with Netanyahu and Palestinian President Mahmoud Abbas on Friday.

Mitchell's efforts are focused on launching indirect peace talks, the official said, speaking on condition of anonymity pending a formal announcement on Mitchell's mission from the Americans.

Last week, Obama issued a surprisingly pessimistic assessment of peacemaking prospects, saying the US couldn't force its will on Israelis and Palestinians if they weren't interested in making the compromises necessary to end their decades-old conflict.

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