The U.S. State Department said on Tuesday that its Middle East envoys are approaching an agreement on renewing negotiations between Israel and the Palestinian Authority. Department spokesman Ian Kelly told reporters that tomorrow's meeting in London between Prime Minister Benjamin Netanyahu and U.S. Middle East envoy George Mitchell may not yield a breakthrough, but that the process aimed at forming a framework for renewing talks is close to bearing fruit.

In his meeting with Mitchell, Netanyahu is expected to stress that Israel will not accept limits on its sovereignty in Jerusalem, in particular in relation to building new housing units in the city. A central focus of the meeting will be the U.S. demand to receive an Israeli "deposit" for freezing settlement construction, in order to prompt a similar gesture from Arab states on taking steps towards normalizing relations with Israel.

Israeli officials believe that the understandings to be reached between U.S. and Israeli representatives will call for a settlement freeze of 9-12 months, but will not include East Jerusalem. Building that has already begun will be allowed to be completed.

Sources close to Netanyahu said the prime minister would tell Mitchell he is interested in renewing talks with the Palestinians soon, preferably following the UN General Assembly meeting in September.

Netanyahu embarked yesterday on a visit to London and Berlin, where he will meet with British Prime Minister Gordon Brown and German Chancellor Angela Merkel. Netanyahu's meetings in both cities will deal with the Iranian nuclear program and the need to increase pressure on Tehran to prevent it from developing a nuclear weapon.

Meanwhile, on the eve of the prime minister's visit to Germany, an embarrassing diplomatic incident has strained relations between Berlin and Jerusalem. Uzi Arad, the prime minister's national security adviser, lost his temper with an adviser to Merkel on raising the issue of settlements during the two leaders' meeting, scheduled for Thursday.

Arad recently held preliminary discussions with the adviser, Christoph Heusgen, by phone. Arad asked the veteran adviser that settlements will not be a central topic of discussion, and that Merkel will not refer to them when talking to the press and the German Foreign Ministry will not issue a formal statement on the matter.

Heusgen refused, on the grounds that the settlements are a fundamental foreign policy issue for his government, and the German position on them is in line with that of Washington.

During a press briefing Friday, a deputy German Foreign Ministry spokesperson was asked if the settlements would be discussed during Merkel's meeting with Netanyahu. He responded, "Germany and the United States have made it clear that the settlements are one of the central issues to the peace process, and that there must be immediate progress on the matter."

"The continuance of the settlements delays the peace process," he said.

Shortly thereafter, Arad contacted Heusgen and demanded that the settlements not be addressed at the meeting with Netanyahu. At a certain point, Israeli and German sources said, Arad began yelling at the diplomat, causing "tremendous stress" between the foreign ministries of the two countries.

The Prime Minister's Office did not deny that Arad asked Merkel's adviser not to raise the settlements issue publicly. The office said, however, that "the talks between Arad and the adviser were held in a friendly and positive manner, and all these issues were met with full agreement and in an excellent atmosphere."

Netanyahu will meet with Brown this afternoon. One of the central issues they will discuss is Britain's indictments against senior Israeli military and political figures on alleged war crimes. Brown is also expected to express criticism against settlement construction.