Israel's defence minister said on Wednesday the Jewish state would be willing to hand over parts of Jerusalem in peace talks with the Palestinians to be launched by U.S. President Barack Obama.

A flare-up of violence in the occupied West Bank and a deadlock over Jewish settlements there loom as potential deal-breakers for Obama, who will host Middle East leaders for dinner at the White House in Washington.

Obama brought Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas together for face-to-face negotiations after months of U.S.-mediated indirect talks. But he faces deep skepticism about his chances of success.

Defence Minister Ehud Barak's rare comments about the need to partition Jerusalem, which is at the heart of the conflict, could signal a softening of Netanyahu's long-stated refusal to divide the holy city in any final peace deal with Palestinians.

"West Jerusalem and 12 Jewish neighborhoods that are home to 200,000 (Israeli) residents will be ours," Barak told the Haaretz newspaper.

"The Arab neighborhoods in which close to a quarter million Palestinians live will be theirs," he added, referring to East Jerusalem, which Israel captured from Jordan in a 1967 war and annexed as its it capital -- a status not recognised abroad.

The Palestinians want a state in the occupied West Bank and the Gaza Strip, with its capital in East Jerusalem, whose Old City houses al-Aqsa, Islam's third-holiest shrine, along with the Western Wall, a vestige of Judaism's two ancient temples.

Commenting on Barak's remarks, a senior Israeli official travelling with Netanyahu said: "Jerusalem is on the table at talks, but the prime minister's position is that Jerusalem must remain undivided."

Such phrasing, however, dangles the possibility of shared access to the city that stops short of physical partition.

Barak told Haaretz that Jerusalem's core religious sites would be administered by a "special regime" -- language that appeared to recall a proposal by Israel's previous, centrist premier, Ehud Olmert, to place the area under control of a consortium including Israelis, Palestinians and Americans.

SHOOTING ATTACK

Barak also said a shooting attack that killed four Israelis in the West Bank on Tuesday would not derail the talks. Militants from the Palestinian Islamist group Hamas, which opposes peace with Israel, claimed responsibility.

Palestinian leaders committed to the peace process joined Israel and the United States in condemning the attack, sending a clear message the talks would go ahead after a 20-month hiatus.

Abbas's security forces arrested 150 Hamas members in the West Bank after the attack.

"This kind of savage brutality has no place in any country under any circumstances," U.S. Secretary of State Hillary Clinton said in Washington shortly as she met Netanyahu.

Obama will meet separately with Netanyahu and Abbas on Wednesday before hosting them for dinner, the warmup for formal talks on Thursday at the State Department.

The summit marks Obama's riskiest plunge into Middle East diplomacy, not least because he wants the two sides to forge a deal within 12 months. He is staking precious political capital on the peace drive in a U.S. congressional election year.

There is also the danger that failure on this front could set back Obama's faltering attempts at winning over the Muslim world as he seeks solidarity against Iran.

STARK REMINDER

The Hamas attack was a reminder that the group, which rules Gaza, remains a threat to peacemaking by Abbas, whose secular Fatah party governs the West Bank. Hamas pledged more violence.

The bloodshed could make Netanyahu less likely to accede to Palestinian demands for more control of West Bank security. They also want Netanyahu to extend a freeze on Jewish settlement building there.

The 10-month, partial Israeli moratorium on new housing construction in settlements expires on Sept. 26. Abbas has said he will pull out from the talks if the freeze is not extended.

Netanyahu, who heads a government dominated by pro-settler parties, has not given any definitive word on whether he will extend it. Obama's aides have been scrambling for a compromise.

Netanyahu said he would insist in the talks with Abbas that security arrangements in any final peace deal would not expose Israel to attacks like Tuesday's roadside shootings.

"We will not let terror decide where Israelis live or the configuration of our final borders. These and other issues will be determined in negotiations for peace that we are conducting," Netanyahu said.

The four Israeli settlers, two men and two women, one pregnant, were shot dead after nightfall on a busy highway close to the flashpoint West Bank city of Hebron.

The White House strongly condemned the attack and urged that it not be allowed to sabotage the negotiations. It took months of U.S. pressure to bring the two sides to the table.

Abbas, who also met Clinton before the summit, condemned "any operation that targets civilians, Palestinians or Israelis". Hamas calls the Western-backed Abbas a "traitor" for talking to Israel.

Egyptian President Hosni Mubarak and Jordan's King Abdullah will attend the White House dinner, expanding the dialogue to two influential Arab neighbors who have made peace with Israel and could promote broader Arab-Israeli reconciliation.