Clinton: Talks Only Way Forward for Mideast Peace

* Clinton says talks "absolutely necessary" for peace

* Acknowledges "we're in a difficult position"

* Urges Arab countries to boost funding for Palestinians

By Andrew Quinn

WASHINGTON (Reuters) - U.S. Secretary of State Hillary Clinton warned Israel and the Palestinians Wednesday there was no "magic formula" to break an impasse over peace talks, but said hard work could still yield a deal.

Clinton, speaking to a Palestinian advocacy group that supports a peaceful end to the conflict, said both Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas remained committed to a two-state solution despite a standoff that threatens to torpedo the U.S.-brokered peace talks less than two months after they were launched.

"Negotiations are not easy, but they are absolutely necessary. It is always easier to defer decisions than it is to make them," Clinton said at a banquet hosted by the American Task Force on Palestine.

"I cannot stand here today and tell you there is a magic formula that I have discovered that will break through the current impasse. But we are working every day to create the conditions for negotiations to continue and succeed."

Direct U.S.-brokered peace negotiations began on Sept. 2, but the Palestinians suspended the talks after a 10-month Israeli moratorium on housing starts in Jewish settlements in the occupied West Bank expired on Sept. 26.

Palestinians fear settlements will deny them a viable and contiguous state. Netanyahu, who shrugged off repeated U.S. calls to extend the ban, says their future should be decided at the negotiating table and not serve as a condition for talks.

The cloudy prospects for direct talks represent a challenge for President Barack Obama, who has staked considerable political capital on the peace process and has said he believes the two sides can reach a deal within a year.

But both sides appear to be digging in before U.S. congressional elections on Nov. 2. Israeli ministers in particular expect that if Obama's Democrats sustain heavy losses as predicted, he may be less eager to force a showdown with Israel and its influential supporters for fears of further undermining his political position.

Clinton said George Mitchell, the Obama administration's special envoy, would return to the region soon.

FOCUS ON THE FUTURE

Repeating messages she has given to Israel, Clinton told the Palestinian group to focus on what could be gained through negotiation, not what might be sacrificed.

"I know there are those who think that if they wait, scheme or fight long enough, they can avoid compromising or negotiating. But I am here to say that that is not the case. That will only guarantee more suffering, more sorrow, and more victims," she said.

Clinton said Israel should do more to relax its economic blockade on the Gaza Strip, which is controlled by the Islamist Hamas, but said states should also publicly disavow Hamas and Lebanon's Hezbollah, sworn enemies of Israel which enjoy strong support from both Syria and Iran.

She praised Abbas' efforts to build the framework for future Palestinian statehood, saying improved governance was creating an environment for more growth and investment. But she said the fledgling state would need more support particularly from the Arab world, which has lagged behind both the United States and the European Union in financing.

"It takes more than words to support making the State of Palestine a reality," she said. (Editing by Doina Chiacu) (For a Take a Look on the Middle East peace talks click [ID:nLDE68P0D9] (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to http://blogs.reuters.com/axismundi)