The United States and Israel said on Tuesday that Israeli-Palestinian peace talks were making progress despite what the Jewish state referred to as its small and limited settlement activities.

Visiting US Secretary of State Condoleezza Rice and her Israeli counterpart Tzipi Livni both struck upbeat notes, despite the lack of tangible progress in a peace process launched last November in the United States.

"We continue to find the way to reach an agreement between Israel and the Palestinians," Livni, flanked by Rice, told reporters at a brief news conference. "Even in these hectic days we continue to negotiate."

Amid jockeying for power in Israel, Rice was making her first visit since Prime Minister Ehud Olmert said on July 30 that he will resign to battle corruption charges after his Kadima party chooses a new leader in September.

Foreign Minister Livni, who leads Israel's negotiating team with the Palestinians, is a front-runner to replace him, as is Transport Minister Shaul Mofaz, a hawkish former general.

Rice said progress was being made despite difficulties, and she was "very heartened by the fact that the negotiations are serious and they are intensive.

"In fact I believe that the parties have succeeded in moving their understandings of what needs to be achieved and indeed their positions somewhat closer together over this period of time," Rice said.

Burgeoning controversy

But in the latest sign of the difficulties faced by the negotiators, Israeli settlement watchdog Peace Now released a report saying that construction of settlements in the occupied territories has doubled since last year.'

"Construction in the settlements has increased by a factor of 1.8 by comparison to the same period last year," the group said in a report, citing government statistics.

"The housing ministry initiated 433 new housing units during the period of January to May 2008, compared to just 240 units during the period January to May 2007," it said.

The international community considers all settlement projects in the occupied territories to be illegal and the Palestinians have repeatedly said that the expansion of settlements is the greatest obstacle to peace.

Livni played down the impact of the activity.

"I would like to suggest to my partners not to use it as an excuse and I know they are not using it as an excuse but I understand their frustration sometimes," Israel's top diplomat said.

"But at the end of the day the Israeli government's policy is not to expand settlements, not to build new settlements and not to confiscate Palestinian land," she said.

"There were some small activities but they will not influence the ability (to negotiate), nor the future of the future borders of the Palestinian state."

Rice again said the settlements were "unhelpful" to the peace process because they could prejudice the outcome of negotiations aimed at determining the borders of a future Palestinian state.

"In fact what we need now are steps that enhance confidence between the parties and that anything that undermines confidence between the parties ought to be avoided," Rice said.

"And we will continue to press ahead to get agreement so that we know what is in Israel and what is Palestinian," she said.

Rice left the news conference for talks with Livni and former Palestinian prime minister Ahmed Qorei, who heads the Palestinian negotiating team, before meeting Palestinian president Mahmud Abbas in the West Bank.