Secretary of State Condoleezza Rice, on her seventh visit to the Middle East since the Palestinians and Israelis re-launched negotiations at the Maryland conference in November, met Tuesday with Palestinian and Israeli leaders to press them to keep talking.

Analysts say the Bush administration was now viewing the ongoing negotiations -- resumed after a seven-year hiatus -- as an achievement, particularly since these talks are covering core issues for the first time.

Deep differences continue to divide the Palestinians and Israelis on Jewish settlement expansion in the West Bank and East Jerusalem, the future status of Jerusalem, borders, and the fate of millions of Palestinian refugees.

Nevertheless, Rice said in a joint news conference with Palestinian Mahmoud Abbas in Ramallah that she still believes an agreement is possible.

"We have a good chance of succeeding," she said.

Abbas also insisted that "just because we have not succeeded yet does not mean we have failed," indicating that the negotiations, being held in secret, will continue until an agreement is made, despite growing domestic Palestinian criticism that the talks are futile and have instead become the objective.

Earlier in the day after holding a three-way meeting with the heads of the Israeli and Palestinian negotiating teams, Foreign Minister Tzipi Livni and Ahmad Qurei respectively, Rice said she was "very heartened by the fact that the negotiations are serious and they are very intensive."

She added in a joint news conference with Livni: "In fact I believe that the parties have succeeded in moving their understanding of what needs to be achieved and indeed their positions somewhat closer together over this period of time."

The Israeli foreign minister sounded just as upbeat, despite the uncertainty surrounding the future of her Kadima party, led by Prime Minister Ehud Olmert who plans to step down next month due to corruption charges he faces.

Livni, a front-runner to replace Olmert, said, "We continue to find the way to reach an agreement between Israel and the Palestinians. Even in these hectic days, we continue to negotiate."

Even the latest damning Israeli report on the settlement surge in East Jerusalem and the West Bank, released by Israel's Peace Now movement on Tuesday, will not stop the two sides from pursuing the negotiations.

The group, citing alarming government statistics, said that construction in the settlements almost doubled in the period from January to May 2008, compared to the same period last year.

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

The international community has traditionally regarded settlement activities in the territories that Israel captured in 1967, including East Jerusalem, as illegal, while the international road map for peace requires Israel to stop all settlement activities.

In a slight shift in U.S. policy leaning away from international tenets, the current administration in Washington has recently started to label the settlement construction as "obstacles" to the peace process, which Rice reiterated on Tuesday.

At the news conference with Livni, Rice described the settlements as "unhelpful," stressing that "what we need now are steps that enhance confidence between the parties and anything that undermines confidence between the parties ought to be avoided."

But Palestinian critics say this kind of soft U.S. diplomacy -- which fails to put real pressure on Israel to stop the settlement expansion on occupied territories where the promised Palestinian state is to be set up -- is the primary cause for a failing negotiating process.

These critics say the Palestinian leadership, which evidently has only control of the West Bank after Hamas threw out the Fatah-led Palestinian Authority from Gaza in June 2007, seems to be the only party coming under pressure by the Americans to remain engaged in the negotiations no matter what.

In comments in Ramallah that sums up the picture, Rice said that "the settlement activity is not conducive to creating an environment for negotiations." But she duly noted: "Yet negotiations go on."