Israeli Prime Minister Benjamin Netanyahu told a cabinet session on Monday that Israel is "in the midst of sensitive diplomatic contacts with the U.S. administration in order to find a solution that will allow the continuation of the (direct) talks" with Palestinians.

Netanyahu has agreed for Israel to extend a recently-ended freeze on Jewish settlement construction in the West Bank for 60 days, in order to allow the talks to continue, according to a report published on Monday by the London-based pan-Arab newspaper Asharq al-Awsat.

But Netanyahu, in a possible response to the report, told ministers that he could not deny what he called a "baseless media report."

"But I do have an interest in responding calmly and responsibly in order to advance the diplomatic process," Netanyahu said.

"We have an interest in moving the peace process forwards. I suggest staying strong and patient, and acting responsibly," Netanyahu said, according to a statement from the Prime Minister's Office.

Jewish residents and supporters of the some 120 communities that are scattered throughout the West Bank, which Jews consider Biblical Judea and Samaria, have chafed at the moratorium decision, taken by Netanyahu last November as a goodwill gesture towards the Palestinians.

The London newspaper quoted Israeli sources as saying that to extend the construction freeze, Netanyahu asked for U.S. guarantees for an Israeli military presence in the Jordan Valley, in any peace agreement with Palestinians, as well as military aid and an U.S. veto at the U.N. Security Council over anti-Israel votes, according to local Ynet news site.

U.S. President Barack Obama reportedly offered Israel a security package in return for keeping the bulldozers silent.

However, White House denied the report, saying "no letter was sent to the prime minister. We are not going to comment on sensitive diplomatic matters," according to Benjamin Chang, a spokesman for the White House National Security Council.

Israeli contractors restarted low-key building projects at a number of sites in the West Bank settlements since last Sunday's conclusion of the 10-month moratorium.

Palestinian leaders have repeatedly pegged continuing recently- started direct talks with Israel on a cessation of settlement construction.

Palestinian President Mahmoud Abbas will arrive in Egypt on Monday for a meeting with Egyptian President Hosni Mubarak on the suspension of the direct talks with Israel as a result of the Israeli settlement construction, the Palestinian ambassador to Egypt said Sunday.

The Mubarak-Abbas meeting is to come ahead of Friday's meeting of the Arab peace initiative follow-up committee in Sirte of Libya to evaluate the overall situation concerning the direct peace talks and to adopt an Arab stance in this respect, Barakat al- Farrah, who is also the Palestinian representative to the Arab League (AL), told the media.

Meanwhile, the Israeli government is compensating Jewish West Bank settlers to the tune of more than 2.5 million shekels (some 680,000 U.S. dollars), for financial losses incurred due to the just-ended construction freeze.

Israel has set up a complaints committee and compensation procedure for housing companies, contractors, groups and private individuals hurt by the building moratorium, according to the Ha' aretz newspaper.

The defense establishment, which has adjudicated 45 out of 109 claims so far, expects to pay out some 60,000 shekels (some 16,000 U.S. dollars) per claimant.