Israeli Prime Minister Benjamin Netanyahu on Monday said for the first time that he would extend the settlement restrictions in the West Bank _ if the Palestinians recognize Israel as the Jewish national homeland.

The idea, while innocuous to Israel's supporters, is widely seen as undermining the rights of Arab Israelis, and was immediately rejected by the Palestinians. But it could signal that Netanyahu is willing to bend and save a U.S.-led peace effort in exchange for a different concession.

The expiration of Israel's 10-month moratorium on new settlement building two weeks ago thrust the month-old U.S.-led peace negotiations with the Palestinians into crisis. The Palestinians are refusing to continue negotiating with Israel as long as settlement building continues, but Netanyahu has insisted the curb on construction was a one-time gesture.

The U.S. administration has been scrambling for weeks to find a creative way out of the quagmire and satisfy both sides and has put heavy pressure on Netanyahu to extend the slowdown, while offering a slew of incentives.

In a policy speech marking a new session of parliament, Netanyahu offered his own formula to move forward.

"If the Palestinian leadership would say unequivocally to its people that it recognizes Israel as the national homeland of the Jewish people, I will be willing to convene my government and ask for an additional suspension," he said, in a speech that was heckled by some lawmakers.

"As the Palestinian expect that we will recognize a Palestinian state as their national homeland, we are entitled to expect that they will recognize Israel as our national homeland," he said.

Netanyahu has made similar demands in the past, though he has never explicitly linked it to the settlement issue. On Sunday, Netanyahu's Cabinet passed a bill that would require non-Jewish immigrants to pledge allegiance to the "Jewish and democratic" state of Israel in order to receive citizenship.

The move is widely seen as undermining the rights of Israel's Arabs who make up a fifth of Israel's 7.5 million people.

The Palestinians also refuse to accept Israel as a Jewish state, saying it violates the rights of millions of Palestinian refugees scattered around the world. Instead, they say it is sufficient that they recognize Israel's right to exist.

Palestinian negotiator Saeb Erekat said the idea was "unacceptable" and accused Netanyahu of "playing games" in his address and said he saw no connection between Jewish settlements and Israel's national character.

"I don't see a relevance between his obligations under international law and him trying to define the nature of Israel," he said. "I hope he will stop playing these games and will start the peace process by stopping settlements."

Some 300,000 Jewish settlers live in the West Bank, in addition to nearly 200,000 Israelis living in Jewish neighborhoods in east Jerusalem.

The Palestinians claim both areas, captured by Israel in the 1967 Mideast war, as parts of a future independent state and say that continued Israeli settlement construction sends a message that Israel is not serious about reaching peace.

Netanyahu counters that the Palestinians _ by demanding a complete settlement freeze _ are imposing preconditions that should be sorted out in the course of direct negotiations.

He said his demand was no such condition.

"But there is no doubt that such a step by the Palestinians would be a confidence building measure that will open a new horizon of trust and faith among large portions of Israeli society who in light of events of the past decade have lost their faith in the Palestinians to end the conflict," he said.

Arab lawmakers heckled Netanyahu throughout his address. "This is a ridiculous proposal!" yelled Ahmad Tibi.

Right-wing lawmakers also heckled the suggestion that the moratorium could be extended.

It remains unclear whether Netanyahu proposed it knowing it would be rejected, or whether the offer signals a true willingness to break the deadlock _ perhaps in exchange for another incentive, from either the Palestinians or Americans.

Netanyahu has been under heavy international pressure to renew the settlement slowdown. U.S. mediators have been offering Israel a series of vague assurances and incentives on the security and diplomatic fronts to get Israel to extend its settlement moratorium.

Netanyahu, who leads a pro-settler coalition of religious and nationalist parties, has resisted the calls thus far, but has signaled he is open to a compromise.

Meanwhile, a senior Palestinian negotiator lashed out at the United States for trying to mollify Israel with incentives.

"It's strange how the violator, who hadn't fulfilled his commitments, is given rewards and guarantees to lure him to implement what must be implemented," Nabil Shaath said.

Since Israel's 10-month moratorium on new building starts expired on Sept. 26, peace talks have stalled less than a month after they were launched at the White House.

Over the weekend, the 22-member Arab League gave the Palestinians another month to reach a compromise.