* After Abbas remark on talks, aide says Netanyahu ready
* U.S. mediator due in region soon to press for negotiations
By Allyn Fisher-Ilan
JERUSALEM, Jan 17 (Reuters) - The Israeli government responded on Sunday to indications that the Palestinians may be willing to resume peace negotiations by saying it was ready to discuss all key issues, including the status of Jerusalem.
An aide to Prime Minister Benjamin Netanyahu said when asked about remarks by Palestinian President Mahmoud Abbas: "Israel sets no preconditions for the resumption of talks, whatsoever.
"We are ready to discuss the core issues of the conflict. The Palestinians can bring their issues to the table and we will certainly bring ours," said the official, speaking on condition of anonymity. "We are ready to discuss everything."
The positive comments on both sides came as President Barack Obama's Middle East envoy George Mitchell was due to launch a fresh round of mediation talks in the region in the coming days in hopes of renewing negotiations stalled since December 2008.
Abbas suspended talks with Netanyahu's predecessor over the Gaza war. Despite U.S. pressure, Abbas has insisted he will not negotiate until Netanyahu halts all Jewish settlement expansion in the occupied West Bank and East Jerusalem. Abbas has called a temporary, partial freeze ordered by Netanyahu insufficient.
Netanyahu's right-wing coalition has responded by ruling out any halt in building on occupied land around Jerusalem which Israel, in defiance of international criticism, has annexed to a city Netanyahu maintains must be Israel's undivided capital.
However, Abbas was quoted on Saturday as indicating that Washington might be in a position to break the deadlock over the settlement issue by presenting an agenda for negotiations on key issues with a view to a comprehensive solution to the conflict.
"Either Israel commits to a halt of settlement, and the terms of reference, or America comes and says this is the endgame with regard to defining borders, the refugee issue, and other final issues, so we can reach a political solution," Abbas was quoted as telling supporters on Friday.
Palestinian officials saw Abbas's comments as a nod to a suggestion from U.S. Secretary of State Hillary Clinton this month that agreeing on borders and the status of Jerusalem could sidestep the deadlock over Jewish settlements.
ISRAELI COALITION RISKS
Agreeing to discuss Jerusalem's future may also help coax Abbas back to the negotiating table but cost Netanyahu problems with his right-wing coalition partners, and force him to turn to the centrists currently in opposition to bolster his government.
Netanyahu was criticised by some on the right of his coalition last year for finally accepting that a "two-state solution", creating a Palestinian state in the West Bank and Gaza Strip, was the ultimate goal of peace talks -- even though he stressed that he did not see this as viable in the near term.
His critics on the pro-settler right oppose any discussion of giving Palestinians a share of Jerusalem for their capital.
The official speaking on Sunday said Netanyahu was, however, ready to talk about all the core issues, which include the status of Jerusalem and of Palestinian refugees -- though he would not make concessions on Israel's positions at the outset.
Illustrating the possible difficulties Netanyahu may face, Israel's Foreign Minister Avigdor Lieberman, an ultranationalist, rejected European Union appeals on Sunday that Israel reduce restrictions on Palestinian movement in occupied territory.
"We have emptied the arsenal of gestures," Lieberman told a news conference, alluding to Israel's easing of roadblocks in the West Bank over the past year to encourage economic growth.
"Now is the time for Palestinians to make gestures." (Additional reporting by Ari Rabinovitch, editing by Alastair Macdonald and Charles Dick)
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