US President Barack Obama insisted he was not giving up on stalled peace talks in the Middle East, but said Israeli settlement-building in the West Bank was not helping the cause.

Mr Obama suggested Palestinians should not make the issue of settlements a condition to resuming peace negotiations with Israel. He said there was no point to negotiations if the expectation was that everything must be worked out in advance.

The President said: "We do not consider continued settlement activity to be constructive, to be appropriate, to be something that can advance the cause of peace. The politics there are complex and I recognise that is not an issue that's going to be solved immediately, it's not going to be solved overnight."

Palestinian Authority President Mahmoud Abbas, appearing alongside Mr Obama at a news conference in Ramallah, West Bank, said Israel must stop illegal settlement building to advance peace talks.

"We are not claiming anything that is illegitimate or illegal," Mr Abbas said in Arabic. "Therefore, we require the Israeli government to stop settlements in order to discuss all our issues and their concerns."

Mr Obama said Palestinians deserved an independent and sovereign state and an end to occupation by Israel. He said the prospect of a contiguous Palestinian state alongside a Jewish state of Israel continued to exist if negotiations would restart.

"I absolutely believe that it is still possible, but I think it is very difficult," Mr Obama said. Speaking after Gaza militants fired two rockets at southern Israel, he also said it would be helpful if rockets weren't still being launched into Israel.

Israeli spokesman Micky Rosenfeld said one rocket exploded in the courtyard of a house in the border town of Sderot, causing damage but no injuries.

The other landed in an open field.

Mr Abbas said he told Mr Obama peace with Israel should not be achieved through violence, occupation, settlements, arrests or denial of refugee rights. The President was visiting the West Bank on his second day of a trip to the Middle East, after spending a day in Jerusalem.

He said he spoke of the settlements during meetings with Israeli Prime Minister Benjamin Netanyahu.

l Iran says if it is attacked by Israel, it will annihilate Tel Aviv and Haifa.

Supreme Leader Ayatollah Ali Khamenei, who has final say on all key decisions in Iran, said Israel is too small to be called an enemy, and the US is the "centre of animosity" toward the Islamic republic.

Israel – believed to be the only nuclear state in the region – has threatened to take military action against Iran if diplomacy fails to stop Iran's alleged nuclear weapons programme, which Tehran says is peaceful.