As the second round of the Palestinian-Israeli direct negotiations nears, the issue of Israel's settlement moratorium has become a major threat to the Middle East peace process, even a determinant for how far the talks can go.

The second round of the negotiations, due on Tuesday in the Egyptian resort town of Sharm el-Sheikh and hosted by Egypt, is expected to gather together Palestinian President Mahmud Abbas, Israeli Prime Minister Benjamin Netanyahu, as well as U.S. Secretary of State Hillary Clinton.

This may be the last round of negotiation before Sept. 26 when Israel's 10-month partial freeze on West Bank settlement construction expires.

Abbas has repeatedly threatened to quit the direct talks if Israel do not extend the freeze on settlement building, putting the talks at the risk of collapse just two weeks after its hard won resumption.

U.S. President Barack Obama, as a response to Abbas' call for U. S. intervention into the settlement moratorium dispute, in Friday' s White House press conference urging Israel to extend the settlement restriction, which is his first direct statement on the issue.

Obama said he told Netanyahu that "it makes sense to extend the moratorium so long as the talks are moving in a constructive way." While acknowledging it is politically difficult for Netanyahu to extend the halt, Obama said the ultimate way to solve the problem is for the two sides to reach agreements on all issues and then Israel can start constructing anything in undisputed areas.

For his part, Netanyahu still rejected the Palestinian demands on settlement freeze in his latest statement, however, he hinted at "midway options" that would see construction resume at a slower pace. The prime minister told Quartet Envoy Tony Blair that Israel cannot continue the moratorium, but also said they will not build all the tens of thousands of housing units in various planning phases.

"Between zero and one there are a lot of possibilities," Netanyahu was quoted as saying in his weekly cabinet meeting on Sunday, whose midway options shows Israel do not want to see the immediate collapse of the negotiation, but wants to see more concession from the Palestinian side on the issue.

Meanwhile, the Palestinian delegation led by chief negotiator Saeb Erekat on Monday reiterated its rejection of Israel's continued settlement activities, and the Fatah Central Committee urged the Palestinian National Authority to suspend direct talks if settlement construction was not frozen in the West Bank.

The Jewish settlement has long been an intractable issue in the Israeli-Palestinian disputes. The Palestinian side called for a total freeze on the expansion of settlements built on the land captured by Israel in the 1967 war as a precondition for resuming direct negotiation.

Some analysts predicted that in the second round of talks, the two sides will try to work out some kind of midway solution to the settlement issue under the U.S. mediation.