British PM upbeat after talks with Israel's PM

British Prime Minister Gordon Brown urged visiting Israeli premier Benjamin Netanyahu to freeze settlement building Tuesday, but said he was "increasingly confident" of progress on Mideast peace.

At the same time the hawkish Israeli leader, on the first full day of a European trip aimed at placating critics, reiterated that Jerusalem remains non-negotiable.

"Jerusalem is sovereign capital of Israel and we accept no limitation to our sovereignty. Jerusalem is not a settlement," said Netanyahu, at a joint press conference with Brown after talks in his Downing Street office.

But he said that a "winning formula" was a demilitarised Palestinian state that recognises Israel as the Jewish state.

"We're working hard to advance a peace process that will lead to an actual peace result. And we hope to move forward in the weeks and months ahead," Netanyahu told reporters.

Israel has come under increasing diplomatic heat over its settlement activity in east Jerusalem and the occupied West Bank and has refused to heed US and other international calls to freeze such construction.

Brown called Netanyahu "a leader of immense courage," saying: "We've had good talks" which "leave me as realistic as ever, but more optimistic than before."

"The Palestinian economy must be allowed to flourish so I strongly welcome his recent moves to remove checkpoints in the West Bank," Brown said, adding that an "economic roadmap should underpin a sustained political dialogue."

"We also discussed the issue of settlements in East Jerusalem. I made it clear that settlement activity was a barrier to a two-state solution," he said.

But he added: "I am increasingly confident... that there is a genuine will to make progress, that a freeze of such activity would result in meaningful steps towards normalisation from Arab states."

As well as the Middle East peace process, Brown and Netanyahu also discussed efforts to halt arch-foe Iran's nuclear drive. The United States has threatened new sanctions if Tehran fails to return to the negotiating table.

Brown reiterated concern over Tehran's nuclear ambitions.

"The region and the world have nothing to fear from a civilian nuclear programme in Iran, but Iran's actions do not make their arguments convincing," the British leader said.

Netanyahu's talks at 10 Downing Street come ahead of a summit on Thursday with German Chancellor Angela Merkel, whose government is traditionally one of Israel's closest allies in Europe.

The visit to London offers Netanyahu a chance to patch up relations with Brown's government, which recently said it was "appalled" by the eviction of two Palestinian families from their homes in a district of Arab east Jerusalem, which was annexed by Israel in 1967 after the Six Day War.

On Wednesday, Netanyahu will meet US President Barack Obama's Middle East envoy George Mitchell.

He is pressing Israel hard to freeze settlement activity in the occupied West Bank and east Jerusalem, where the Palestinians hope to establish the capital of their promised future state.

Britain and Germany are among the many states to back the US demand, seen as key to reviving the peace talks halted last December when Israel launched a deadly offensive against the Hamas-ruled Gaza Strip.

Netanyahu said Israel has removed 147 checkpoints in the West Bank -- and called on Palestinians to respond.

"We've moved on the ground, I've also moved not only in deed but in word. I have spoken about the need to achieve this balance of a demilitarised Palestinian state next to a Jewish state.

"We have moved, we expect similar movement from the Palestinian Authority," the Israeli leader said.