By Arshad Mohammed

WASHINGTON (Reuters) - Israeli-Palestinian peace negotiations could possibly resume without a complete freeze in Israeli building of Jewish settlements, a senior U.S. official suggested on Thursday.

The official, who spoke to reporters on condition of anonymity, said it was more important that the scope of a settlement freeze was acceptable to the Israelis and the Palestinians than to the United States.

The Obama administration hopes next month to announce a resumption of Israeli-Palestinian peace talks, which have been stalled since December, but the pieces have not yet fallen into place, diplomats and U.S. officials said.

U.S. special envoy George Mitchell is trying get Israel to freeze its construction of Jewish settlements, a Palestinian condition for resuming talks. He has also asked Arab states to offer some gestures toward normalization of ties with Israel.

Even if Israel and the Palestinians agree to resume talks, analysts believe chances of a peace agreement any time soon are slim because of divisions among the Palestinians and a fragile, right-wing coalition in Israel.

The Obama administration has taken the public stance that Israel must halt all settlement activity, including so-called "natural growth" under which new homes are built within existing enclaves to accommodate growing settler families.

While saying this was still Washington's position, the U.S. official suggested the United States would not stand in the way if the two sides could agree on something short of that.

"Are we going to argue, if at some point the parties say, 'you know, this is not everything that we hope for but it's enough?" asked the U.S. official. "That would then have us presenting an obstacle to the start of a negotiation."

Mitchell and Israeli Prime Minister Benjamin Netanyahu issued an unusually upbeat statement after meeting in London on Wednesday, saying that their talks were "very productive" and that they had made "good progress."

However, Netanyahu on Thursday denied that they agreed on a temporary halt to settlement building. An Israeli team is due in the United States next week for more talks and Mitchell will return to the region in September.

About half a million Israelis live in settlements built in the West Bank and East Jerusalem in territory captured by Israeli forces in the 1967 Middle East War.

Palestinians want to establish a state in the West Bank and Gaza Strip, with its capital in Jerusalem.

An Arab diplomat suggested neither side will get everything that it wants, with the Palestinians likely to accept something short of a total settlement freeze while Israel gets only symbolic normalization steps from Arab states.

"Whatever deal we get on the settlements will be less than perfect," said the diplomat, who asked not to be named.

"In other words, there comes a point where they just have to take what they can get," he said. (Editing by Alan Elsner)