Update

Source: Reuters

By Allyn Fisher-Ilan

TEL AVIV, Aug 29 (Reuters) - Israel will postpone any decision on whether to extend a partial freeze on settlement construction until after the Sept. 2 start of peace talks in Washington, a senior cabinet minister told Reuters on Sunday.

Vice Premier Silvan Shalom said he viewed Palestinian calls for a further freeze before the talks began as "unacceptable" and voiced concern the demand could trigger a crisis in Israel's pro-settler government and lead to an early national election.

Prime Minister Benjamin Netanyahu had promised him that his cabinet would vote on the issue only after the Jewish High Holidays, which begin at sundown on Sept. 8. or after the peace summit is held, Shalom said in an interview.

"He told us today there will be no decision on Sept. 2 about freezing settlements," Shalom said, quoting Netanyahu from a closed-door session with ministers, adding this meant it would be about another two weeks before the government would vote.

Netanyahu will meet Palestinian President Mahmoud Abbas at direct peace talks convening for the first time in nearly two years this week at the White House, at the invitation U.S. President Barack Obama.

The Palestinians have said any resumption of Jewish settlement building in the West Bank once a 10-month partial moratorium expires on Sept. 26 would bring an end to the direct talks.

The World Court has deemed the settlements built in territory Israel captured in a 1967 war as illegal. Israel disputes this. Palestinians see the enclaves as depriving them of land they need for a viable, contiguous state.

Netanyahu, facing pressure from pro-settler groups in his government, consulted on Sunday with other ministers about a compromise that would see construction launched only in several large settlement blocs Israel wants to keep under any deal.

"UNACCEPTABLE DEMAND"

Shalom, a veteran of Netanyahu's right-wing Likud party, said he would object to even a partial extension of the freeze, calling it "an unacceptable demand" on Abbas's part and would mean Israel was setting its border ahead of a peace accord.

He said any Palestinian insistence on a further freeze during peace talks could pose "a real, real serious obstacle (and) might bring an end to the negotiations before they start".

Besides, Netanyahu's ruling coalition may not survive a further settlement freeze, Shalom added.

"It will bring destabilisation" as pro-settler ministers who dominate the cabinet, pressed by their constituents lobbying for new construction, may resign in protest, which could lead to an early national election, he said.

The next Israeli poll is scheduled for 2013.

Shalom said Netanyahu could not necessarily count on the centrist Kadima party for support if right-wing partners bolted, alluding to the power of personal rivalry in Israeli politics.

He explained how in the late 1990s a similar dispute over U.S.-led peace talks led left- and right-wing parties to join hands in toppling Netanyahu from his first term as premier, and he subsequently lost an election held the following year.

(Additional reporting by Ari Rabinovitch in Jerusalem; Editing by Michael Roddy)