By Jeffrey Heller

JERUSALEM (Reuters) - Israeli Prime Minister Benjamin Netanyahu said on Sunday there were still gaps to bridge in talks with a visiting U.S. envoy seeking a settlement freeze and the revival of Israeli-Palestinian negotiations.

"There is still work to be done. Progress has been made on some issues and there are certain things in which we have yet to make progress," Netanyahu, due to meet envoy George Mitchell on Monday, told reporters.

"I hope we will be able to narrow the gaps and perhaps to bridge them so that we can move forward in the diplomatic process," Netanyahu said, without elaborating.

Mitchell, who arrived in Israel late on Saturday, planned to meet Foreign Minister Avigdor Lieberman and President Shimon Peres later on Sunday and see Palestinian President Mahmoud Abbas in the West Bank city of Ramallah on Tuesday.

Israeli leaders have been looking for evidence from Mitchell of progress in Washington's efforts to persuade Arab countries to take initial steps toward normalizing relations with Israel as part of any settlement deal.

Netanyahu was to travel to Cairo later in the day for talks with Egyptian President Hosni Mubarak likely to focus on the settlement issue.

They were also expected to discuss Egypt's efforts to broker a prisoner swap between Israel and Hamas that would include the release of an Israeli soldier held by militants in the Gaza Strip since 2006.

A deal on halting building in settlements in the occupied West Bank could pave the way for a meeting involving Netanyahu, U.S. President Barack Obama and Abbas on the sidelines of the U.N. General Assembly in New York around September 23.

Abbas has said he would not restart peace talks with Israel, suspended since December, unless it committed to a settlement freeze as stipulated by a 2003 "road map" that charts a course toward Palestinian statehood.

"NATURAL GROWTH"

"(Abbas) will tell Mr. Mitchell what he told him last time he met him: There will be no compromise in relation to settlements. Israel must halt all settlement activities including natural growth," Palestinian chief negotiator Saeb Erekat said.

Citing a need to accommodate the "natural growth" of settler families, Netanyahu has said construction of some 2,500 homes for Israelis in the West Bank would continue, and that Jerusalem would not be included in any settlement deal.

Some 500,000 Israelis live in settlements in the West Bank, land which Israel captured in a 1967 war and Palestinians seek for a state, and Arab East Jerusalem, which Israel has annexed as part of its capital in a move not recognized internationally.

Palestinians, who number about three million in the West Bank, say settlements deprive them of land for a viable country.

Stoking Palestinian anger and drawing U.S. condemnation, Israeli Defense Minister Ehud Barak approved last Monday 455 building permits in settlements.

The move was widely seen in Israel as a bid to placate settlers before any freeze of construction starts. An Israeli government official said it was a step toward a "package" deal that could include "very severe limitations in the growth of settlements -- a possible moratorium."

In the West Bank city of Hebron on Sunday, a Palestinian shot by Israeli soldiers at a military checkpoint two weeks ago died of his wounds, hospital officials said. The Israeli army said the 25-year-old tried to stab a soldier, an account disputed by Palestinians who said they witnessed the incident.

(Editing by Matthew Jones)

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