The gap is narrowing between Israeli and Palestinian leaders over the amount of territory Israel would hand over to a Palestinian state, people close to the talks said a month ahead of a U.S.-sponsored conference.

But Israeli, Palestinian and Western officials say sketching the boundaries of a future state may be the easy part -- real progress, they say, depends on narrowing differences over the fate of Jerusalem and Palestinian refugees, on which little progress can be discerned so far after closed-door meetings.

Even vague talk of dividing the city has stirred opposition within Israeli Prime Minister Ehud Olmert's coalition cabinet.

Israeli officials link easing their stance on Jerusalem -- which Israel wants to keep as its undivided capital -- to the Palestinians being prepared to soften their demand that refugees and their descendants be allowed to settle in Israel.

"In this tortuous process, everything is difficult, everything is problematic. But Jerusalem and refugees are the most difficult issues," said Shlomo Ben-Ami, who was Israel's leftist Labor foreign minister when the last talks on the "final status" of a peace deal collapsed in 2001.

Olmert and Palestinian President Mahmoud Abbas have said little in public about talks they have held in recent months.

Western officials have told Reuters Olmert has privately signaled a willingness to consider handing over "90-something" percent of the occupied West Bank and all of the Gaza Strip, with additional land swaps, as part of a final peace deal.

That may put the two sides within a few percentage points of consensus on the territory issue ahead of the Annapolis meeting.

ARITHMETIC

Western officials said it was unclear whether Olmert's "90-something" percent means he might match Israel's last and best offer before negotiations broke down in 2001. At that time, Prime Minister Ehud Barak accepted ideas floated by U.S. President Bill Clinton that would have produced a Palestinian state in 97 percent of the West Bank and 100 percent of Gaza.

Abbas's negotiating team considers the Clinton parameters and follow-up talks held in Taba, Egypt to be the basis for renewed negotiations with Olmert, Palestinian sources said.

Abbas, in one of the rare public comments on the talks so far, said this week that a Palestinian state must have exactly as much land as that seized by Israel in the 1967 war.

Ben-Ami said: "We don't need to invent the wheel ... These are the Clinton parameters. I don't see any other solution."

But Olmert spokeswoman Miri Eisin said it would be wrong to see one past proposal as "the one" to guide future negotiations.

U.S. Secretary of State Condoleezza Rice will visit Jerusalem and the West Bank Ramallah next week to press Abbas and Olmert to reach agreement on a joint document addressing "core issues" for the conference, which President George W. Bush hopes will launch a final push to end the 60-year-old conflict.

"We feel a growing sense of urgency from Washington," said a senior Israeli official. He said he feared Israel's security concerns were not being taken fully into account in Bush's rush for some sort of deal before leaving office in early 2009.

"They are eager to get results," the official said.

"Desperation breeds foolishness."

Western officials said heavy U.S. pressure on its Israeli ally would make it very difficult for Olmert to offer less than Clinton's 97 percent figure for West Bank land. Yet that could also trigger a backlash from within his own coalition.

"Everyone wants peace but they don't want to pay the price," said Ben-Ami. "The maximum Olmert can offer falls short of the minimum for the Palestinians. If he makes proposals that are more far-reaching, he will lose his coalition."