By Dan Williams and Phil Stewart
TEL AVIV (Reuters) - Defense Secretary Robert Gates urged Israeli and Palestinian leaders Thursday to advance stalled peace efforts, as rockets exploded near Israel's heavily populated coastal area south of Tel Aviv.
Gates' visit to Israel came as surging violence raised fears of a new war, with Palestinian rockets striking deep inside Israel Thursday and Israeli aircraft pounding targets in Gaza.
"Israelis will have to make their own decision in terms of how to respond. No sovereign state can tolerate having rockets fired at its people," Gates told reporters in Tel Aviv, flanked by Israeli Defense Minister Ehud Barak.
A senior U.S. defense official, briefing reporters ahead of the trip, said Washington believed Israeli and Palestinian leaders needed to get ahead of a wave of unrest sweeping the region by advancing peace efforts.
Although uprisings in Tunisia, Egypt, Yemen, Bahrain and Libya were focusing for now on domestic political and economic grievances, that could change, the official suggested.
Asked about the dangers of any heavy-handed Israeli response to the rockets, as well as a deadly bombing in Jerusalem on Wednesday, Gates said that militants might want to shift the attention away from internal political problems.
"I think we all just need to be mindful ... that we don't want to do anything that allows extremists or others to divert the narrative of reform," Gates said.
BOLD ACTION NEEDED
Gates, who had talks with Israeli President Shimon Peres, acknowledged that regional instability might be a tempting reason to be more cautious about pursing peace efforts, with talks stalled since September 2010.
"But in my meetings with Israeli and Palestinian leaders, I carry a different message: That there is a need and an opportunity for bold action to move toward a two-state solution," Gates said.
Netanyahu last year refused to extend a limited freeze on West Bank settlement construction as requested by the Americans after the Palestinians made it a condition for renewing peace negotiations.
Gates was due to meet President Shimon Peres later on Thursday. Friday, he will meet Israeli Prime Minister Benjamin Netanyahu and Palestinian Prime Minister Salam Fayyad.
Gates was fresh from a visit to Egypt, where he met with Field Marshal Mohamed Hussein Tantawi, the 75-year-old general commander of the armed forces who heads the military council leading the country since the ouster of President Hosni Mubarak.
The fall of Egypt's authoritarian ruler during a popular uprising last month set off alarms in Israel, whose peace accord with Egypt has given it stability on its southern flanks and has helped successive Israeli leaders maintain the status quo in the unresolved Palestinian conflict.
But both Gates and Barak praised Tantawi, and expressed confidence the Egyptian military would honor the historic Camp David peace treaty.
(Editing by Elizabeth Fullerton)