Israel was up in arms Sunday after Washington's special envoy to the Mideast suggested the U.S. might impose sanctions on Israel to press it to make concessions in negotiations with the Palestinians.

Talks broke down a year ago and have not resumed because the Palestinians insist that Israel first halt all construction on disputed lands they want for a future state. Israel says the Palestinians should return to the negotiating table without conditions.

Envoy George Mitchell was asked in a television interview last week what sort of pressure could be applied to Israel.

"Under American law, the United States can withhold support on loan guarantees to Israel," Mitchell told PBS interviewer Charlie Rose, noting that the previous Bush administration had done so in the past.

But he quickly added that he preferred persuasion to sanctions.

Under the Bush administration, Israel received billions of dollars in guarantees, which are U.S.-backed loans with favorable interest rates. In 2003, the U.S. whittled down the guarantees after Israel built part of its separation barrier inside the West Bank rather than completely along it on the Israeli side.

Prime Minister Benjamin Netanyahu's office issued a statement in response to Mitchell's comments, pinning the blame for the negotiations logjam on the Palestinians.

"Everyone realizes that the Palestinian Authority refuses to renew peace talks, while Israel took significant steps to advance the process," the statement said.

In late November, Netanyahu announced that construction in Jewish West Bank settlements would slow down for 10 months, but not cease. He said building in east Jerusalem would proceed without restrictions.

Israel captured east Jerusalem and the West Bank from Jordan in 1967. The Palestinians and the international community consider Israeli construction in both areas to be settlement activity, and do not recognize Israel's annexation of east Jerusalem.

The Palestinians so far have rebuffed U.S. pressure to abandon their demand for a total construction freeze in both areas. They also want talks to resume where they left off under Netanyahu's predecessor, Ehud Olmert, who proposed sharing Jerusalem and ceding wide swaths of the West Bank to a future Palestinian state.

Israel says it has no preconditions for talks and is willing to immediately discuss all outstanding issues. But Netanyahu has said repeatedly that Israel does not intend to share Jerusalem, whose eastern sector the Palestinians claim for a future capital. And historically he has opposed giving up all the West Bank land the Palestinians claim.

The Palestinians say such positions offer little common ground for talks to succeed.

On Friday, the Obama administration laid out a major shift in its Mideast peace strategy, suggesting both sides move past this impasse by tackling defining borders for a Palestinian state and the status of Jerusalem.

Secretary of State Hillary Rodham Clinton said that dealing with those matters first would eliminate Palestinian concerns about continued construction in the West Bank and east Jerusalem.

The Palestinians' immediate response was to hold fast to their demand for a complete construction freeze: If Palestinian President Mahmoud Abbas retreats now from his demand for a complete settlement freeze, that could further hurt his standing among Palestinians who are increasingly skeptical about peace efforts.

However, if the new U.S. strategy will include support for holding the talks based on pre-1967 war borders, Abbas could present that as a major achievement.

Greater clarity is expected after Mitchell visits Israel and the Palestinian territories later this month. He plans to visit Paris and Brussels first to build support for the approach from European officials.