The US Secretary of State Hillary Clinton says Israeli and Palestinian leaders are "getting down to business" and tackling the main issues of the Middle East conflict.
Israel's Prime Minister Benjamin Netanyahu and the Palestinian President Mahmoud Abbas are holding more talks to try to overcome a row over Jewish settlement building that could sink their push for peace.
The two leaders failed in talks on Tuesday in Egypt to find a compromise over the settlements, but Washington's Middle East envoy George Mitchell said the pair discussed several core issues that split the two sides and said that they were convinced they could reach a deal within a year.
A 10-month Israeli moratorium on new housing construction in West Bank settlements expires on September 30 and Palestinians have said they would quit the US-brokered talks if building resumes.
Mitchell said after meetings in the Egyptian Red Sea resort of Sharm el-Sheikh that he believed they were "moving in the right direction overall".
Secretary of State Clinton is also hopeful of a resolution: "They are getting down to business. They have begun to grapple with the core issues that can only be resolved through face to face negotiations."